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Henry Paulson Tells Senate Democrats To Get Real

by Mike Godfrey, for, New York

24 April 2007

After a week in which leading Democrats and the General Accounting Office looked to the fabled 'tax gap' to collect more money without seeming to increase tax rates, Treasury Secretary Henry Paulson told a Senate hearing that trying to reduce the level of uncollected tax significantly would do more harm than good.

"There is a big part of the tax gap that we simply won't be able to reach without adding draconian and painful requirements on all taxpayers," he said. "The cost of compliance for individuals and businesses, most of whom already pay what they owe, would far outweigh the gains," he added.

Addressing the Democrats' plan to finance tax cut extensions by closing the tax gap, he warned: "The tax gap is simply not a pot of gold. Nor should it be viewed as an easy solution to existing challenges, such as the alternative minimum tax."

Last week, the Government Accountability Office said that improved IRS reporting would help the IRS bring in more of the $345 billion in taxes that supposedly go unpaid each year. And Senate Finance Committee Chairman Max Baucus, at the same hearing, challenged the Treasury and the Internal Revenue Service to increase voluntary tax compliance to 90% within ten years from the current 83.7%.

In order to collect more taxes, the IRS would have to impose significantly more reporting requirements on taxpayers, say opponents of Democrat plans. But as Nina Olson, the National Taxpayer Advocate, recently said: "No one wants to be obligated to file a document with the IRS every time he or she takes a cab ride, has someone mow their lawn, or calls a plumber to fix a broken faucet."

A better approach, says the Heritage Foundation, would be to simplify the tax code by reducing rates and broadening the tax base by getting rid of the myriad of deductions and loopholes that now plague the system. At 17,000 pages, the tax code is incredibly complex, leading to many compliance problems, and every year Congress inserts more complicating loopholes and special interest provisions into it.

"The American people have a right to expect that their government will have a goal and a credible plan to reduce this tax gap," thundered Max Baucus, "and it is the Treasury's job to fix it. Yet the administration does not appear to take the job seriously."

Baucus called upon Paulson to reappear before the Committee on July 18, 2007 to deliver his plan, "complete with benchmarks and timetables." But Paulson told him that he doubted a workable plan could be assembled.

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