- The Washington Times - Tuesday, March 31, 2009

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.

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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.

Nabbing tax scofflaws and honest taxpayers who mistakenly stiff the government is just a piece of the president’s crowded tax agenda. His other plans — which would net about $350 billion over 10 years — include eliminating tax breaks for big oil companies and raising income-tax rates on private equity managers.

The most likely target in the tax-gap hunt would be to expand “third-party reporting,” which accounts for the high compliance rate when workers’ income is recorded on W-2 fillings.

Lax third-party reporting among small businesses and others who deal in the cash economy accounts for as much as a third of the tax gap, economists say. Increasing the compliance burden, however, is bound to encounter resistance from the business lobby.

Critics say the administration is not apt to collect any significant piece of the tax gap.

“The money does not come in. It’s not going to come in again,” said Sen. Jeff Sessions, Alabama Republican, who used to prosecute tax fraud as a U.S. attorney.

“It’s a big nothing,” he said of promises to close the tax gap. “It’s just flim-flam. It’s been that way for a number of years, and we are not going to balance our budget on that.”

Administrations since at least the Reagan administration have invoked tax-gap reduction in one way or another. President Reagan said $31 billion of his 1982 tax increase was in reality a narrowing of the tax gap.

But then-Vice President George H.W. Bush, in his successful run for the White House, slammed Democratic nominee Michael S. Dukakis’ plan to cut the deficit by capturing what was then estimated to be $35 billion a year in unpaid taxes.

He said it would take an “auditor army” of more than 105,000 new IRS employees to flush out the tax debt.

Mr. Obama also must contend with the public’s discomfort with a more intrusive IRS as he devises a collection strategy.

“It is pie-in-the-sky if you talk about it but you do not create the facilities,” said Sen. Ben Nelson, Nebraska Democrat. “The IRS doesn’t seem to be positioned to do it. It takes staffing and the right staff in the position to do it.”

Still, he said pursuing the money is “worth trying, absolutely.”

Former President George W. Bush tackled a $290 billion tax gap in his 2008 budget but was criticized by Democrats for proposing measures that would rake in only about $2.9 billion a year. They said pinching 1 percent of the tax gap was insufficient.

Senate Finance Committee Chairman Max Baucus, who is eyeing tax-gap revenue to help pay for Mr. Obama’s sweeping health care reforms, said past administrations only paid lip service to tax-gap reduction.

“They have not worked at it; believe me, they have not worked at it in the past,” the Montana Democrat said. “Since [Mr. Obama] talks about it affirmatively, it gives me better hope.”

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