Paul L. Caron
Dean





Wednesday, November 22, 2023

Sen. Crapo: Democrats’ Tax Gap Manipulation

Sen. Mike Crapo (R-Idaho; Ranking Member, Senate Finance Committee), Democrats’ Tax Gap Manipulation, 181 Tax Notes Fed. 1457 (Nov. 20, 2023):

The IRS recently issued a new projection of the tax gap [IRS Research, Applied Analytics and Statistics, “Federal Tax Compliance Research: Tax Gap Projections for Tax Years 2020 and 2021” (Oct. 12, 2023)]. While the projection’s release received much attention and some hand-wringing from Democrats, it actually adds little to the previous estimate. Essentially, the new projection adjusts that estimate for recent receipts, not changes in compliance. 

The tax gap figure is used to gauge taxpayer compliance and projects the difference between taxes believed to be owed and taxes actually paid. Per the IRS’s projection, the 2021 tax gap is $688 billion, an increase of over $192 billion compared with the 2014-2016 estimate [IR-2023-187, Updated Tax Gap Estimate Shows Big Jump From Prior Years (Oct. 12, 2023)].

In releasing this information, the IRS pledged an “urgent” crackdown by boosting IRS enforcement, especially on high-income individuals, partnerships, and corporations. But the premise for this new crackdown is built on a flawed foundation, albeit a convenient narrative to support the IRS’s bloated budget and new auditing regime.

It is crucial here to understand what the IRS’s $688 billion projection is and is not. It is simply a projection of what the 2021 tax gap would be, assuming that the tax law and compliance rates from the 2014-2016 estimate are held constant and applied to the 2021 economy.

The IRS claims the tax gap is dramatically rising. This is misleading at best. ...

When viewed in proportion to the economy’s size over the last 20 years, the tax gap is actually flat and historically average. The Cato Institute examined the tax gap as a percentage of GDP and found that for 2021, the tax-gap-to-GDP ratio was 2.9 percent, squarely in line with the last 20 years of estimates.

Cato 3

Chris Edwards (Cato Institute), New IRS Estimate of the Tax Gap (Oct. 13, 2023). ...

With its new tax gap projection the IRS conveniently created a justification for its supersize supplemental enforcement budget. Yet the IRS’s bold proclamations are stale and misleading. Measuring the tax gap requires a better approach using relevant, reliable data and sound methodology. If such a true tax gap estimate were published, I would expect to see evidence of the Tax Cuts and Jobs Act’s positive impact on the tax gap.

Senate Finance Committee Hearing, Examining How the Tax Code Affects High-Income Individuals and Tax Planning Strategies (Nov. 9, 2023):

Member Statements

Ron Wyden (D - OR) (statement)
Mike Crapo (R - ID) (statement)

Witnesses

Chye-Ching Huang (statement)
Director, Tax Law Center
New York University School of Law

Morris Pearl (statement)
Chair, Patriotic Millionaires

William McBride, Ph.D. (statement)
Vice President Of Federal Tax Policy, Tax Foundation

Douglas Holtz-Eakin, Ph.D. (statement)
President, American Action Forum

https://taxprof.typepad.com/taxprof_blog/2023/11/sen-crapo-democrats-tax-gap-manipulation.html

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