It is time to start a tally of how many times Congress spends revenues raised from closing the tax gap.
It’s an annual tradition. Each year, Congress picks out its favorite revenue raiser and then uses that revenue over and over again to pay for new spending or tax relief. Past contenders include overturning the Schmidt Baking decision, codification of the IRS’s economic substance test, SILOs, LILOs, COLI, etc. For 2007, the tax gap is the leading contender, and it’s already being used up.
As CongressDaily reported last week, the budget includes more than twenty “reserve funds” that allow for additional spending on a wide range of domestic programs, but only if the additional spending is offset with spending cuts or tax increases. How will all of this new spending get paid for? The tax gap, of course.
“[Senate Budget Committee Chairman] Conrad [contended that] most of the additional revenues required in the next fiscal year could be obtained by closing the ‘tax gap’ by collecting taxes that now go uncaptured, and by curtailing offshore tax havens and tax shelters.
“Frankly, I don’t think it’s very difficult to achieve,” Conrad told reporters afterward. “Anybody who tells me they can’t collect 15 percent of this money that’s in tax havens and tax scams, they better get a new revenue commissioner because it ain’t that hard. I did it when I was a tax commissioner [in North Dakota.]”
The audience of the recent IRS Roundtable on the Tax Gap got a different point of view. From IRS Commissioner Everson to business community representatives such as Macy Davis from the National Federation of Independent Business, the panel uniformly agreed that, while the Congress and IRS should do what they can to ensure people pay what they owe, collecting this revenue is complicated and not pain free, especially for compliant taxpayers who will have to live with the increased reporting and enforcement requirements.
Senator Grassley, Ranking Member on the Senate Finance Committee, has also raised concerns about pressing the tax gap too far. As he stated on the Senate floor this week:
“I find that the tax gap is one of those issues here in Congress that is a little like the weather: Everyone wants to talk about it but no one is doing anything about it. But the way people talk around here, they view that the tax gap is a ‘cure-all.’ Have to pay for AMT? Tax gap. Want to expand spending on health care? Tax gap. Balance the budget? Tax gap. Given the amount of faith people have put into it, tax gap has suddenly become one of those magic elixirs the peddlers used to sell in the old west. ‘It will cure what ails you’ was the slogan the slick salesmen used to say. And so the tax gap has become the elixir for all fiscal problems. I’m surprised folks don’t think the tax gap can cure baldness.”
Of course, the real danger is that Congress pays for its new spending plans with tax increases that have little or nothing to do with the tax gap. We have already seen an increase in S corporation payroll taxes paraded under that banner. Before these new “reserve funds” are funded, we’ll probably see it again.