Opinion Editorial | |
| Monday, April 20, 1998 | |
Lower Tax Rates Increase Compliance |
Especially at this time of year, the Internal Revenue Service is reluctant to talk about the growing problem of tax evasion in this country. The IRS depends heavily on self-reporting of income and voluntary compliance with the tax laws. Auditing only reaches fewer than one percent of taxpayers and it simply is impossible for the IRS to forcibly compel total compliance. Not surprisingly, therefore, there is strong evidence that more and more taxpayers are failing to fully report income and pay all the taxes they owe. This in turn, encourages other taxpayers to do the same. The result is an undercover tax revolt, in which taxpayers in effect privatize their own taxes. It is always hard to measure the amount of income that is unreported. However, a good estimate can be obtained by comparing the IRS's figure for adjusted gross income (AGI), which comes directly from tax returns, and the Commerce Department's estimate of AGI from aggregate sources, such as total wages paid by corporations and interest paid by banks. If compliance were perfect, the two figures should be the same. But the Commerce Department reports more than $600 billion more in AGI than shows up on tax returns. This is called the AGI gap. The Commerce Department considers the AGI gap to be a rough indicator of noncompliance with the tax law. And looking at the AGI gap as a share of its estimate of AGI is a good way to measure compliance over time. The relative AGI gap is very sensitive to changes in tax rates (see figure). When rates were cut in 1986, the AGI gap fell from almost 14 percent of AGI to 10 percent. But when tax rates were raised in 1990 and 1993, the gap rose as the tax saving from noncompliance increased. Efforts to force taxpayers to pay what they owe have proven to be futile. The New York Times reports that when rules for paying "nanny" taxes on household help were tightened in 1994, the number of taxpayers paying such taxes fell from 500,000 to 300,000. It also reports that growing numbers of workers simply won't work unless paid cash that is unreported to the IRS. Indications are that the problem will only get worse. According one estimate, there are now 25 million Americans who are self-employed, independent contractors or temporary workers. These workers find it much easier than traditional wage employees to avoid taxes. As more and more home-based workers join their ranks, the problem of tax evasion will only grow. For them, compliance with the tax law truly is becoming voluntary. Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), April 20, 1998. Home | Support Us | All Issues | Social Security Debate Central | Contact Us |
