The Tax Gap: Can much of it be closed?
The two principal approaches for closing the tax gap are more information reporting and stepped up enforcement by the Internal Revenue Service. Both are worth pursuing, despite some additional costs, but neither promises to reduce the tax gap significantly.
- The president’s 2008 budget includes a number of proposals to expand information reporting. One would require brokers to report to the IRS the cost of assets sold by taxpayers (they currently must report only the gross sale price); another would require banks to report credit card sales by merchants. The Treasury estimates that all their proposals would raise about $29 billion over ten years, less than 1 percent of the tax gap.
- Sustained increases in IRS enforcement funds could lead to more revenue. If, for example, the $11 billion IRS budget proposed for 2008 were permanently raised by 20 percent, with the increase directed to enforcement, the IRS could ultimately raise $9 billion to $10 billion more per year at fiscal 2008 levels. This estimate includes direct receipts from enforcement only and not any increase in voluntary compliance in response to the increased enforcement.