Democrats out to close elusive tax gap

Democrats at both ends of Pennsylvania Avenue say they are going after the Holy Grail of deficit reduction: the “tax gap.”

Administrations for decades sought to close the gap between what taxpayers owe and what they actually pay, a bucket of lost revenue now valued at about $300 billion a year.

The quest has never paid off.

President Obama and the Democratic majorities in Congress, already forced to justify the massive shortfalls projected in the administration’s budgets for 2010 and beyond, say this time will be different as they prepare for a massive overhaul of the tax code and look for creative ways to help pay for an ambitious agenda for health care and education.

The president created a tax-policy task force, headed by former Federal Reserve Chairman Paul A. Volcker, to come up with proposals by Dec. 4 for how to attack the tax gap as well as simplify the tax code and end “corporate welfare.”

Congress’ Democratic leaders don’t know how much money the task force can squeeze out of the gap, but they already are citing the windfall as part of Mr. Obama’s strategy to reduce the deficit. The plan also includes eliminating waste, fraud and abuse in federal programs and exposing the government to more public scrutiny.

“We’ll work with the White House to make sure that uncollected taxes are collected. You know, it’s to the tune of over $350 billion,” House Speaker Nancy Pelosi, California Democrat, told reporters.

The issue may surface very quickly, as Internal Revenue Service officials testify before a House Ways and Means subcommittee Tuesday.

The tantalizing prospect of adding new revenue without new taxes — a flood of money from unreported cash transactions, deals cut across international borders and honest filing mistakes — stood out on the task force’s to-do list.

“I do want to say $300 billion a year or more is a lot of money, and we are interested in being as aggressive as possible in trying to reduce that number,” White House Budget Director Peter Orszag said.

He said there might even be more money in the tax gap because of the complexity of modern financial deals, including international transactions.

Not so fast, cautioned Bob McIntyre, director of the liberal-leaning Citizens for Tax Justice, a nonprofit group that advocates closing corporate tax loopholes and making the wealthy pay a fair share of taxes.

Though he applauded the administration’s plan to go after money that some wealthy Americans and U.S. corporations hide offshore, Mr. McIntyre said most of the $300 billion the IRS estimates in uncollected revenue comes from hard-to-tax casual income such as tips and under-the-table wages.

“It’s a wild guess by the IRS that involves small-potatoes stuff that is hard to go after,” Mr. McIntyre said. “You can close some of it, but it’s hard. Otherwise, it would already have been done.”

Capturing the lost money would help pay for Mr. Obama’s $3.6 trillion budget for 2010, which seeks to make permanent middle-class tax cuts and swells spending on a host of programs ranging from government-run health care options to development of alternative energy technology.

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