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Senators Look To Tax Reform To Close US Tax Gap

by Leroy Baker,, New York

25 January 2007

Senate Budget Committee Chairman Kent Conrad (D - N.D) has called upon fellow lawmakers to explore ways in which the tax code can be simplified in order to reduce the 'tax gap' - the measure of the difference between what is legitimately owed by taxpayers and what is actually paid.

According to Conrad, the need for specific proposals to tackle the tax gap has become "absolutely urgent" and he has called for the creation of a Senate working group to recommend how this could be achieved. This working group will initially feature Senators Ron Wyden (D - Ore) and Debbie Stabenow (D - Mich). Sen. Chuck Grassley (R - Iowa), who has much experience of legislating in the tax arena in his recent role as the chairman of the Senate finance committee and current position as committee ranking member, will also be asked onto the working group.

Noting that the 2001 tax gap, at an estimated $345 billion, was $100 billion more than the federal deficit for 2006, Conrad stated in his opening remarks at a budget committee hearing on the subject on Tuesday that more could be done to tackle the problem of non-compliance "without resorting to draconian or intrusive measures."

"While we will never be able to close the tax gap entirely – make no mistake, we understand we aren’t going to collect all $345 billion a year; there is always going to be some tax gap – but it is clear that much more can and should be done," he said.

Conrad referred to testimony before the committee by Internal Revenue Service Commissioner Mark Everson that the tax gap could be closed by as much as $100 billion "without changing the way the government interacts with its citizenry.”

In her 2006 Annual Report to Congress, the National Taxpayer Advocate Nina Olson wrote that compliant taxpayers pay "a great deal of money" each year to subsidize noncompliance by others with each household effectively charged a "surtax" about $2,680 to cover unpaid revenues in 2001.

In a report released by the Government Accountability Office on Tuesday, tax reform or simplification was also identified as one of the methods by which the tax gap could be narrowed. However, the GAO report stressed that a "multiple approach" was needed to address the problem such as providing the IRS more enforcement tools, and devoting additional resources to enforcement.

Nonetheless, the GAO estimated that simplifying the tax code or fundamental tax reform has the potential to reduce the tax gap by billions of dollars. The IRS has estimated that errors in claiming tax credits and deductions for tax year 2001 contributed $32 billion to the tax gap.

"Fundamental tax reform would most likely result in a smaller tax gap if the new system has few, if any, exceptions (e.g., few tax preferences) and taxable transactions are transparent to tax administrators," the report stated.

The GAO suggested that withholding and information reporting are "particularly powerful tools" to reduce the tax gap, although it conceded that designing additional withholding and information reporting requirements may be challenging given that many types of income are already subject to reporting, underreporting exists in many forms, and withholding and reporting requirements impose costs on third parties.

Additional enforcement has the potential to narrow the tax gap by another several billion dollars said the GAO, but it conceded that such results would depend on how efficiently the IRS used its resources.

"Providing quality services to taxpayers also is a necessary foundation for voluntary compliance," the GAO said.

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