WILFORD: Senators Rightly Avoid Tax Gap Wild Goose Chase

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Andrew Wilford National Taxpayers' Union Foundation
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A bipartisan group of senators has reached an agreement on an infrastructure bill. Though there is plenty of room to question the wisdom of spending another half a trillion dollars at a time when the U.S. is already set to run a deficit of over $6 trillion between this year and last year alone, there’s at least one good thing to be said about the bipartisan deal: it avoided an ill-advised effort to try to close the “tax gap.”

The tax gap, or the gap between taxes owed by American taxpayers and taxes collected by the federal government, gained special attention of late when Internal Revenue Service (IRS) Commissioner Chuck Rettig claimed that it could possibly have grown as large as $1 trillion. Media outlets, predictably, ignored all nuance, such as how the statement was presented as Rettig’s own opinion, how Rettig made the statement in the context of a hearing asking for more IRS enforcement funding, and how the IRS’s official stance was still that the tax gap was just $381 billion.

Instead, the idea that the tax gap was $1 trillion became gospel, fueling a bidding war for who could propose the most new enforcement funding for the IRS. President Biden proposed $80 billion in new IRS funding, claiming it would raise $780 billion over the next decade, while Sen. Elizabeth Warren proposed $315 billion in IRS funding to raise $1.75 trillion over ten years.

Yet while Biden and Warren were promising ever-more outlandish revenues to be gained from tax enforcement, the underlying numbers had changed little. The official IRS number is perhaps a little low, given the rise of cryptocurrency and some other factors, but it’s unlikely the tax gap has doubled compared to that IRS estimate, let alone reached $1 trillion in a year. The nonpartisan Congressional Budget Office, meanwhile, still rated the revenue to be gained from increasing enforcement funding by $40 billion at just $103 billion over the course of a decade.

Of course, that’s not what progressives wanted to hear. The narrative they were pushing was that increasing tax enforcement funding was a magic revenue bean, a painless and common-sense way to achieve a revenue windfall by cracking down on wealthy tax cheats. After all, there’s almost nothing politicians love more than a source of revenue that doesn’t come from increasing taxes on honest taxpayers.

Had they succeeded in putting this phantom pay-for in an infrastructure deal, it would have had little chance of raising the promised revenue, as progressive estimates of new revenue were based on faulty numbers. That would mean a deal they could say had “offsets,” but really just would have been yet another charge on the generational credit card. The fact that it didn’t make it into the final proposal likely suggests that CBO and the Joint Committee on Taxation didn’t buy Biden and Warren’s fantastical estimates of revenue to be gained.

And tax enforcement advocates weren’t just arguing in bad faith in regards to the scope of the tax gap, as it’s also false that the tax gap is solely the fault of wealthy tax cheats. For example, roughly a tenth of the tax gap is due to refundable tax credits, which generally go to low-income taxpayers and have high rates of improper payment. Much of this, and other underpayment, is due to honest mistakes — the tax code is complicated, and most Americans aren’t CPAs. Not every improperly taken credit or deduction is taken maliciously or dishonestly.

Even setting all that aside, the IRS is hardly an agency with its ducks in a row as it is. By this year’s tax day, delayed by a month as it was, the IRS had a backlog of 30 million tax returns to work through, including 1.7 million from previous tax years. In part, this was due to the fact that 42 percent of printers and copiers needed for processing returns didn’t work because the agency didn’t do the work necessary to update its printing contracts. It’s simply infeasible to expect that this is an agency which could put massive amounts of new funding effectively towards tax enforcement.

While the tax gap is a real issue worthy of investigation, Senators were right to avoid the half-baked schemes put forth by some. Should IRS enforcement funding come back to the table, it needs to be in the context of measured, realistic proposals that take into account other agency needs, not lottery tickets hoping to hit the jackpot.

Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.