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Tuesday, January 30, 2007

WSJ: The "Tax Gap" Myth

Interesting editorial in the Wall Street Journal:  The "Tax Gap" Myth:

When something sounds too good to be true, it usually is. So now is an apt time to deconstruct the much-discussed "tax gap," that mythical golden goose that the Beltway political class is counting on to fund its spending agenda. ...

The "tax gap" is the difference between what the IRS thinks taxpayers should be paying and what it collects. The IRS currently estimates this at about $290 billion a year. Ask any Congressional chairman how he intends to close the deficit, expand the Medicare drug benefit, reform the Alternative Minimum Tax or subsidize college education, and the answer is invariably "close the tax gap."

There is a better way. The more complicated a tax system, the more likely taxpayers won't understand, or will try to dodge, the rules. Simple tax regimes, such as a single flat rate, encourage compliance and efficiency, not to mention economic growth. This has been the experience of many Eastern European countries after they imposed a flat tax, and the U.S. had similar jumps in reported tax income from "the rich" following the 1986 tax reform that cut rates and closed loopholes.

At least a few "tax-gap" critics in Washington are beginning to understand all this. Messrs. Baucus and Grassley have started pairing the "tax gap" problem with the need to eliminate or simplify the Alternative Minimum Tax -- which is hitting more and more Americans. House Ways and Means Chairman Charlie Rangel has also said that fixing the AMT might require "a look at the whole tax code." Could it be that even Washington is beginning to understand that fixing the tax mess means starting over?

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Comments

Typically disingenuous tripe from the WSJ pro-wealthy hacks: the hard part about doing one's taxes isn't figuring out the percentage that one pays. That's about 10 minutes work.

The hard part (and the place where most cheating occurs) is working out what is and isn't in certain categories of income and what kind of deductions one takes and so forth. And that's entirely driven by politics, and in most cases, the politics of specific business lobbies and lobbies for the super-rich. Let's see the WSJ argue for *real* simplification of the income tax code, where the same progressive rates are levied on all income, without a break for returns on investment income. That would make things much simpler.

Posted by: paperwight | Jan 31, 2007 8:13:12 AM