Bush budget: Going after $300 billion
Proposed tax code changes to narrow the tax gap would affect investors, individuals and businesses, but likely would raise only $29B over 10 years.
NEW YORK (CNNMoney.com) -- President Bush in his 2008 budget proposal tackled what he and everyone on Capitol Hill say they want to do: narrrow the tax gap, the estimated $290 billion owed each year but not collected.
But the estimated revenue generated from his proposed measures to boost taxpayer compliance is just $29 billion over 10 years or $2.9 billion a year, an amount characterized as insufficient by some leading Democrats.
"We're not asking for the moon," said Senate Finance Committee Chairman Max Baucus (D-Montana). "We're asking for more than one cent on the dollar."
The vast majority of Americans (84 percent) pay their federal taxes in full, but the cost to them of folks who don't is equal to roughly $2,200 per return, according to estimates from National Taxpayer Advocate Nina Olson, who cites the tax gap as one of the most serious problems facing taxpayers.
The cost-per-return is likely higher, though, since the tax gap estimate does not include illegal income that goes unreported.
No one, however, claims the problem is easily solved. One chief concern: Not making compliance too expensive or burdensome for companies and individual taxpayers.
Bush's 2008 budget calls for 16 measures that would, among other things:
Boost third-party reporting, including on investment cost basis: Under current law, financial institutions are not required to report your cost basis to the IRS, only the price at which you sell the security. It's up to you to provide the difference.
Under Bush's proposal - which echoes the recommendation of Olson and the Government Accountability Office (GAO) - brokerages would have to report both cost basis and sales price.
The portion of the tax gap due to investors inflating their cost bases - thus narrowing their capital gains liability - is between $11 billion and $21 billion, according to various estimates.
Expanded penalties: The president's proposals would expand penalties on tax preparers, and create two new penalties - one for failure to comply with electronic filing requirements and another for making an erroneous refund claim.
They would also make repeated failure to file a tax return a felony.
Boost business compliance requirements: The president's budget would, among other things, require banks to report to the IRS merchants' annual credit card payments, and to require some large businesses to file electronically.
While the White House budget office estimates that taken together, the 16 measures could cut the tax gap by $29 billion over 10 years, the number could be higher because some taxpayers might pay what they owe if they knew the IRS was getting tougher, according to Tax Analysts, a publisher of tax information and analysis.
That only $29 billion would be recovered over 10 years is an indication that boosting witholding and information reporting requirements can only do so much, said Marc Gerson, former majority tax counsel to the House Committee on Ways & Means under former chairman Bill Thomas (R-Calif.).
The biggest source of the gap (44 percent) comes from under-reporting of income by small businesses and the self-employed, while only 10 percent comes from under-reporting of corporate income, Gerson said.
Yet, he noted, corporations will foot a large part of the bill to conform to increased reporting requirements. "It's not a flick of the switch," he said of implementing a new cost-basis reporting system given the volume of trades and the frequency with which investors may switch brokers.
Nevertheless, the Securities Industry and Financial Markets Association (SIFMA) characterized the proposal as "constructive." "It is prospective, provides flexibility to Treasury to create exemptions and ensures that brokers receive from issuers the necessary information so that brokers can pass it along to investors," said SIFMA director of tax policy Patricia McClanahan in an e-mail.
Research on the sources of the tax gap are dated since they're based on 2001 numbers. And the causes for under-reporting of income aren't entirely clear. The IRS has noted that confusion over how to comply with complex tax laws contributes to the gap, but it's not known just how much of the gap results from that confusion versus willful noncompliance.
Olson and the GAO have suggested that tax simplification is another way lawmakers can reduce the tax gap. Simplification was a major theme in the final report of the president's tax reform panel submitted to the Treasury in November 2005. However, fundamental tax reform hasn't been on the political radar in any significant way since then, and while its long-term effects could be beneficial its short-term costs could be high.