NCPA - National Center for Policy Analysis

Uncollected Taxes

December 10, 1996

According to the Internal Revenue Service, about 13 percent of income which is taxable is not taxed. This is known as the "tax gap" -- the difference between what individuals and companies owe in income taxes and what is eventually paid to the government.

  • In 1973, the gap was estimated at between $28 billion and $32 billion; by 1992, it had grown to between $110 billion and $127 billion.
  • The IRS estimates that self-employed persons -- who are not subject to tax withholding -- account for nearly one-fourth of the tax gap.
  • The IRS cites other factors as contributing to the tax gap: the growth of the global economy (where companies can shift costs from country to country for a tax advantage) and growth of the underground economy.
  • The underground economy was estimated at 1 percent of Gross Domestic Product in 1981 and 1985-86 by researchers at Michigan's Survey Research Center.

But political economists point out that for more than two decades the nation's tax code grew enormously in size and complexity -- leading many to conclude that citizens are confused as to what income to report and how to calculate the amount of their taxes.

The IRS has established a goal of 90 percent tax compliance by 2000. Critics say it intends to pursue that goal using tactics which would jeopardize taxpayer privacy. Tax reform advocates say the nation could achieve compliance and avoid a host of privacy invasions and other problems simply by enacting a flat tax.

Source: Laura M. Litvan, "The IRS' Big Collection Problem," Investor's Business Daily, December 10, 1996.


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