Wednesday, January 31, 2007
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?