The Tax Gap

http://economix.blogs.nytimes.com/20...0/the-tax-gap/

The ‘Tax Gap’
By BRUCE BARTLETT

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of the coming book “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

In keeping with its apparent policy of releasing important economic reports late on Friday afternoons in the hope that no one will notice them, the Obama administration published new estimates of the so-called tax gap on Jan. 6. They deserve more attention.

For many years, the Internal Revenue Service has been studying the tax gap, which is the difference between aggregate tax liabilities and revenue collected. The data just released are for the 2006 tax year and update the most recent previous data, which were for the 2001 tax year.

According to the study, in 2006 Americans owed $450 billion more in federal taxes than they paid, an increase of $105 billion over 2001. The I.R.S. estimates that the compliance rate declined slightly to 83.1 percent in 2006, from 83.7 percent in 2001. In other words, people voluntarily pay only about 84 percent of the taxes they owe.

The I.R.S. estimates that enforcement actions will eventually bring in some of the uncollected revenue. It says that $55 billion of the 2001 tax gap was subsequently collected and that $65 billion of the 2006 gap will be. Thus the net tax gap is a bit lower: $290 billion in 2001 and $385 billion in 2006. The ultimate compliance rate, therefore, is 86.3 percent for 2001 and 85.5 percent for 2006.

Noncompliance primarily takes the form of unreported income rather than taking unjustified deductions, exemptions and such. The bulk of unreported income is among unincorporated businesses, which can much more easily hide income from the I.R.S. than workers who primarily earn wages from which their employers withhold taxes.

Keep reading the rest of the article by clicking on the link