TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, June 11, 2017

Weekly SSRN Tax Article Review And Roundup

This week, Erin Scharff (Arizona State) reviews a new working paper by Jay Soled (Rutgers) and James Alm (Tulane), W(h)ither the Tax Gap?, 92 Wash. L. Rev. 521 (2017).

Scharff (2017)In their thoughtful new article, W(h)ither the Tax Gap?, Jay Soled and James Alm make a persuasive case that several economic trends are likely to narrow the tax gap in the near future.  As they note, such progress on tax compliance could play a significant role in closing the deficit. 

In particular, Soled and Alm highlight three trends that they suggest make it more likely that tax authorities will be able to improve compliance in the coming years.  First, the increasing reliance on electronic payments makes it more difficult for would-be tax cheats to hide income.  These days, even taxicabs, convenience stores, and valet attendants accept credit cards.  (Not to accuse all of these occupations of cheating, but those paid in cash can more easily hide their earnings.)  Second, as Soled and Alm observe, as the use of cash declines, “[t]hose who use cash, especially large denomination notes, will likely be flagged as potential tax evaders.”

The second trend Soled and Alm highlight is the amount of information now available to tax authorities electronically.  Digitization has reduced the cost of third-party reporting, allowing Congress to mandate the increased collection of income information. Soled and Alm suggest this “expansion of third-party tax information reporting shows no signs of abating.”  Such information collection provides the IRS with ever more opportunities to detect tax evasion.  Soled and Alm also highlight the role of FATCA in reducing hidden overseas assets and income.

Finally, Soled and Alm point to the increasing percentage of the workforce employed by medium-to-large companies.  They cite at 2012 study finding that less than twenty-percent of U.S. workers are employed by companies with fewer than 20 employees.   Employees of larger companies usually have fewer opportunities to avoid reporting income than those working in sole proprietorships or for small businesses.

As Soled and Alm write, as of now, “there is little empirical information that directly supports the proposition that these three trends . . . are closing the tax gap.”  They make a persuasive case that we might see such evidence soon.  However, I do wonder how these trends will interact with other developments.  For example, while one trend in the workforce is for increasing labor force concentration in large companies, there has also been considerable attention devoted to potential increases in the contingent workforce.  Those in this “gig economy” include not only Uber drivers but also workers ranging from day laborers to graphic designers.   

Soled and Alm also note some reasons for caution, including the possibility that technology may increase tax evasion (via virtual currencies or other forms of hidden transactions).   I want to focus on another reason Soled and Alm suggest the path to greater compliance may not be so easy:  continued underfunding of the IRS.  Without additional resources, increased information reporting may not lead to as much compliance as we would otherwise predict, and the tax gap could, in fact, worsen.   

While Soled and Alm focus on the income tax gap, there’s something to be learned from a tax where compliance is even lower:  the use tax.  There are simple step states could take to increase use tax payments, including requiring use tax reporting on state income tax forms and offering residents a formula based on income to calculate the likely tax owed.  Yet, such reforms don’t seem to be catching on. (Arizona doesn’t even provide a form for individuals to report their use tax obligations.)  To me, this suggests that tax authorities in many states are uninterested in improving use tax compliance, at least of individual state residents.

More generally, I’m skeptical that political actors (both elected officials and voters) are actually interested in taking the steps necessary to increase income tax compliance. Soled and Alm identify reasons for technocratic optimism that may compensate for some of this political intransience, but to the extent the compliance gap is also a policy choice, I fear we are years away from improvement.  Needless to say, I hope I am proved wrong.


Here’s the rest of this week’s SSRN Tax Roundup:

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