IRS Commissioner Charles Rettig made news last week when he endorsed a new tax gap estimate from, among others, French economist Gabriel Zucman. We reviewed the Zucman paper here and found it typically wanting – questionable assumptions and methodologies leading to improbable conclusions.
That didn’t stop Rettig from endorsing the estimate, however. Well, he sort of endorsed it. Here’s what he actually said, according to Bloomberg:
Internal Revenue Service Commissioner Chuck Rettig told a Senate panel Tuesday that previous tallies of the tax gap — which came to a cumulative amount of about $441 billion for the three years through 2013 — didn’t include some tax evasion-techniques that weren’t on their radar at the time.
New estimates include the use of cryptocurrency, he said. Offshore tax evasion, illegal income that goes undetected by the IRS and underreporting from pass-through businesses also contribute to a larger than previously known tax gap, Rettig said. “I think it would not be outlandish to believe that the actual tax gap could approach and possibly exceed $1 trillion per year,” Rettig told the Senate Finance Committee. [Emphasis added]
Any statement that includes the phrases “would not be outlandish to believe” and “could approach and possibly exceed” is hardly definitive, especially coming from the organization that’s spent more time studying the issue than anybody. Howard Gleckman of the Tax Policy Center said it sounded “like a man just trying to get his budget increased.” It sounded to us like a man uncomfortable with the talking points put in front of him.
This kinda-sorta statement didn’t slow the press any, who pounced with typical enthusiasm. The New York Times won the Most Ridiculous Headline award, claiming: “Tax cheats cost the U.S. $1 trillion per year, I.R.S chief says.” Members of Congress quickly followed suit. As Law360 reported:
Several key Democrats said the rough estimate by the Internal Revenue Service commissioner, Chuck Rettig, of a current annual tax gap of $1 trillion would bolster support for more IRS funding and enforcement measures targeting businesses and wealthy taxpayers. That estimate, which Rettig gave in a Senate hearing on Tuesday, is up from the official estimate of $441 billion annually from 2011 to 2013, before factoring in late payments and enforcement work.
Given all this, our question is: Is there any hope for a dose of reality in the tax policy debate this year?
The answer is yes. One person did step up. Former National Taxpayer Advocate Nina Olson – who spent nearly two decades looking over shoulders at the IRS – offered a refreshingly skeptical view:
Speaking on an Urban-Brookings Tax Policy Center webinar April 15, Olson said her reaction to Rettig’s announcement was “Where did that number come from?”
Olson, who headed the Taxpayer Advocate Service from 2000 to 2019, faulted the IRS commissioner’s sourcing, methods, and assumptions in calculating a $1 trillion tax gap. Rettig’s inclusion of underreported taxes on cryptocurrency transactions, as well as research the IRS contributed to finding up to $175 billion in offshore entity underreporting, “still doesn’t add up to $1 trillion,” Olson said.
Host Howard Gleckman then asked Olson how big of a problem the tax gap really is:
Equating the entire tax gap to “tax evasion” is just so disingenuous. And it’s also wrong; it’s incorrect. Evasion has a technical meaning under the law, and generally it requires mens rea, a criminal intent. So much of it is error, or inadvertent…there are a bunch of different types of noncompliance. And if you say [it’s all tax evasion] – and that’s what the Washington Post called it, that’s what the New York Times called it – then that creates distrust among the taxpayers of the tax agencies. [They’re asking], “why am I paying if you’re letting all these people off the hook?”
Finally, Olson reminded webinar viewers that the tax gap is relatively small – just 16 percent of taxes owed. For perspective, that’s one of the best collection rates in the world, which poses its own challenge as every additional dollar collected at the margin is “harder to get.”
The tax gap has always been the Holy Grail of congressional pay-fors. It doesn’t require new taxes, just better enforcement of existing rules. But like the Grail, it’s proven to be an elusive quarry. As Olsen points out, a large percentage of the tax gap is the result of taxpayers who are broke and simply unable to pay what they owe. No amount of IRS funding will collect that money.
To summarize: economists with a history of questionable work and an aggressive political agenda write a working paper, the IRS commissioner references it in the weakest possible terms, and now we’re ready to legislate. The tax gap is an important challenge and it deserves an honest discussion. You’re not going to find that discussion in anything associated with the Zucman paper.