Press Releases
February 1, 2005
Close the Tax Gap Now
With the Bush administration now estimating that the 2005 federal budget deficit will climb to $427 billion – the fifth straight year of budget deterioration and the third straight year of record shortfall – it is clear that our nation’s finances are in serious trouble. We need a comprehensive deficit reduction plan that addresses both the spending and revenue sides of the ledger.
But the first step we should take to address the nation’s financial woes is to close the tax gap – the difference between the amount of taxes owed and the amount actually paid. Closing the tax gap will lower the burden on the vast majority of Americans, who year after year pay their fair share. When the American people pay their taxes, they deserve to know that they aren’t paying higher amounts because others are avoiding their responsibilities.
Addressing this problem has nothing to do with changing tax rates or raising taxes on anyone. The tax gap is money owed by corporations and individuals under the current tax laws that is going unpaid, either due to taxpayer error or intentional evasion.
The size of the tax gap problem is staggering. Last year, the Internal Revenue Service (IRS) estimated that the tax gap was $311 billion in 2001, and only about $56 billion of that would ever be recovered given the agency’s current capabilities. To help put that $311 billion in perspective, consider that the tax gap was about the amount we spent on all domestic discretionary spending (excluding homeland security) in 2001 – that’s all funding for areas such as education, veterans, health research, and transportation. And this year, IRS is expected to release updated tax gap estimates that will show that the tax gap has grown significantly worse over the last few years.
The added burden on taxpayers is very real. IRS’s National Taxpayer Advocate recently testified that the tax gap added about $2,000 to the average tax bill in 2001. If that’s not enough to prompt action on this problem, I don’t know what is.
I am not alone in my concern about the tax gap. Current and former IRS Commissioners, as well as the Government Accountability Office, have repeatedly documented the harmful effects of the tax gap both on government finance and respect for the law. The IRS Oversight Board, created in 1998 as an independent body to provide the IRS with long-term advice and direction, listed closing the tax gap as its top recommendation in its 2004 annual report. The Board concluded that the tax gap “is unacceptable to honest taxpayers.”
Although some like to blame spending for our record deficits, we need to remember that the primary cause for the nation’s budget deterioration has been the dramatic drop in revenues over the last few years – falling from 20.9 percent of GDP in 2000 to 16.8 percent of GDP in 2005. In fact, revenue loss accounts for 74 percent of the downturn from the surplus in 2000 to the deficit in 2005. The growing tax gap has been part of that revenue drop.
We simply cannot bring the budget back to balance by looking only at spending. Both sides of the federal ledger have to be considered. And I believe that closing the tax gap should be the first step we take to put our nation’s finances back in order.
Senator Kent Conrad (D-ND) is the ranking member of the Senate Budget Committee and a senior member of the Senate Finance Committee.
