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'Tax Gap': Pot of Gold for Congress?

Tuesday, 6 Feb 2007 | 11:42 AM ET
Tax Gap: Pot of Gold
The tax gap, the difference between what the government is owed and what it collects, is a hot topic in D.C. Max Sawicky, Economic Policy Institute Economist; Alison Fraser, Heritage Foundation Economic Policy Director; and CNBC's Mark Haines discuss the topic.

Now that President George W. Bush has submitted his $2.9-trillion, fiscal-2008 budget, Congress will debate just how much money will actually be spent – and which programs will get that money. But as legislators search for ways to finance their spending agendas, more and more of them are looking to the “tax gap” as the pot of gold they need. But is it?

The tax gap, or the difference between what the Internal Revenue Service is owed and what it collects, has been a recent buzz word around Washington. But whether or not it is a viable source of revenue for the government is up for debate.

Max Sawicky of the Economic Policy Institute says there’s $350 billion in annual taxes not paid on time or voluntarily to the IRS.

“Almost anything the IRS could do ... to close [the tax gap] would work,” says Sawicky. “And it would more than pay for itself in terms of the cost. So there’s really no reason not to go ahead and try to attack this problem.”

Stronger enforcement, walk-in centers for taxpayers and more education are all strategies to close the gap that Sawicky endorses.

Alison Fraser says we don’t know exactly how much the tax gap really is, so it's probably not a good idea to bank on that money. Besides, the problem is the tax code, not errant citizens or businesses that don’t want to pay up. Fraser, the director of economic policy studies at the Heritage Foundation, notes that 85% of these “tax gappers” are just average people who get lost in the 17,000-page tax law.

“People are trying to pay their taxes, but it’s really hard for them to do so,” Fraser says.

Sawicky agrees that simplification of the law can help, but he's wary of a legislation-only method of closing the gap. Congress – especially the Republicans that had been in control from 1994 until last November’s elections – has a tendency to make things worse, not better, he says.