Newspaper logo  
 
 
Local News & Opinion

Ref. : Civic Events

Ref. : Arts & Education Events

Ref. : Public Service Notices

Travel
Books, Films, Arts & Education

08.29 10 Years After Katrina, New Orleans’ All-Charter School System Has Proven a Failure

Letters
Open Letters:

Ref. : Letters to the editor

Health Care & Environment

08.29 Psychology experiments are failing the replication test – for good reason

08.29 Climate change legislation approaches pivotal showdown with oil industry

08.29 World's biggest coal port joins fossil fuel divestment push

08.28 Pesticides Killing Bees: Study Shows What 'Everybody's Suspected'

08.28 Gun Control: Where Each of the Presidential Candidates Stands [an IQ test]

08.28 The Raging Future of American Wildfires

08.28 The day we stopped Europe’s biggest polluter in its tracks

08.28 The key to water security could be lurking in a New Mexico sewage farm

08.28 Digging into big coal's climate connections

08.28 Texas teenager creates $20 water purifier to tackle toxic e-waste pollution [video]

08.27 DOE Attempts to Jump-Start Concentrated Solar

08.27 The Drought Isn't Just a California Problem

News Media Matters

Daily: FAIR Blog
The Daily Howler

US Politics, Policy & 'Culture'

08.29 Donald Trump and the shadow of Europe’s far-right

08.28 America’s Great Infrastructure Stagnation

08.28 Gun violence in America, in 17 maps and charts

08.27 4 Reasons Why a Biden Run Would Help Sanders

08.27 Watch Poverty in School Districts Escalate Before Your Very Eyes [interactive map]

08.27 Why Louisiana Fought Low-Income Housing in New Orleans After Katrina

Justice Matters

08.29 Phone hacking: CPS may bring corporate charges against Murdoch publisher

08.28 Future Jails May Look and Function More Like Colleges

08.28 The Case Against Cash Bail

High Crimes?

08.27 Mustard gas 'likely used' in suspected Islamic State attack in Syria

08.27 Tolerant and multicultural, Palmyra stood for everything Isis hates

Economics, Crony Capitalism

08.29 Europe [and America] shouldn’t worry about migrants. It should worry about creeping fascism<

08.29 CEOs Call for Wage Increases for Workers to Address Inequality! What’s the Catch?

08.25 The Emerging-Market Currency Rout

International

08.29 Paris prepares to rid its streets of cars for one day

08.29 A manifesto for conscious cities: should streets be sensitive to our mental needs?

08.29 'Nazi gold train': deathbed confession may have revealed location

08.28 Rx for Prosperity: German Companies See Refugees as Opportunity

08.28 Vietnam to free 18,200 prisoners in amnesty, but no political activists

08.28 Japanese police bracing for gang war as Yamaguchi-gumi mafia group splits

08.28 Migrant crisis: up to 200 dead after boat carrying refugees sinks off Libya

08.28 Hungarian police arrest driver of lorry that had 71 bodies inside

08.27 Mass Migration: What Is Driving the Balkan Exodus?

08.27 The Big Dig

08.27 Rape, ignorance, repression: why early pregnancy is endemic in Guatemala

08.27 Denmark reveals €800m tax fraud – the country's biggest

We are a non-profit Internet-only newspaper publication founded in 1973. Your donation is essential to our survival.

You can also mail a check to:
Baltimore News Network, Inc.
P.O. Box 42581
Baltimore, MD 21284-2581
Google
This site Web
  Print view: Self-Reporting Drives $385 Billion 'Tax Gap'
ECONOMIC ANALYSIS:

Self-Reporting Drives $385 Billion ‘Tax Gap’

by Gerald E. Scorse
The IRS reports that the net misreporting percentage for amounts subject to little or no information reporting, such as business income, is 56%. This should impel Congress to beef up income verification.

The real divide in U.S. incomes isn’t between the top 1 percent and the other 99 percent. It’s between those whose income is reported by their employers to the Internal Revenue Service, and those who self-report. The divide is costing the Treasury about $200 billion a year, and Congress should gradually phase it out.

Tax compliance studies have consistently linked self-reporting with Treasury shortfalls. The link was underscored early this year when the IRS released its latest estimate of the nation’s “tax gap”—the difference between true tax liabilities and what the Treasury receives. The IRS put the gap at $385 billion, with more than half stemming from unreported work income.

Here’s the key statement from the IRS summary of the new gap numbers: “For example, the net misreporting percentage for amounts subject to substantial information reporting and withholding is 1%; for amounts subject to substantial information reporting but no withholding, it is 8%; and for amounts subject to little or no information reporting, such as business income, it is 56%.”

Think for a moment about an income misreporting percentage of 56%. It means that taxpayers with incomes “subject to little or no information reporting” are paying, on average, less than half what they should be paying. The better part of the tax gap comes from assuming that human beings will act like angels when they self-report their work income. (True, there’s always the chance of an IRS audit. But odds are there won’t be any audit, and thousands of taxpayers are obviously playing the odds.)

The new gap totals should impel Congress to beef up income verification. Any such move, of course, would generate fierce resistance. Economist Bruce Bartlett held top posts under presidents Reagan and George H.W. Bush and now blogs for a major daily. His remarks on the IRS data touched on the obstacles to reporting reform: “People don’t like the intrusion into their privacy—and the diminution of their opportunities for tax evasion—and businesses don’t like the cost or the alienation of their customers.”

The straight up answer to all such complaints comes from 2008 GOP presidential candidate John McCain: “Country First”. Fiscal prudence, national togetherness and tax fairness all argue powerfully for less porous reporting rules.

The billions that lose their way to the Treasury will likely increase the federal deficit, leaving a hard choice. We can raise taxes, or go without the societal benefits that $385 billion would buy. We could also stem the leakage. The nation and all taxpayers benefit from income reporting for wages and salaries. The nation would also benefit, and it would only be fair, if information reporting could become the norm for current honor system tax filers—self-employed professionals, small business owners, landlords and others. As Bartlett wrote, “It’s unfair to honest taxpayers and undermines tax morale when large numbers of people and businesses don’t pay their taxes.”

President Obama’s State of the Union address called for an America where “everyone does their fair share, and everyone plays by the same set of rules.” A current example on Wall Street shows that income reporting rules can move closer to that goal, and even gain bipartisan backing.

This is year two of the three-year phasing in of new rules for reporting capital gains. Proceeds from the sale of stocks and mutual funds were formerly reported to the IRS, but not the purchase price, called the basis. Since capital gains can’t be verified without knowing the basis, it was easy for taxpayers to misreport their investment income. Basis reporting began as the initiative of former Senator Evan Bayh (D-IN). It became a bipartisan bill when Bayh convinced fellow fiscal hawk Sen. Tom Coburn (R-OK) to sign on. The Bush Administration later added its endorsement.

There are ways of making business income reporting almost as simple as wage and salary income reporting (and much closer in tax compliance as well).

The reasons for basis reporting of capital gains apply many times over to information reporting of work income. The Treasury’s loss is far greater, as are the potential gains to taxpayers from simplified record-keeping and tax preparation. Businesses, for example, could have bank accounts with deposits coded as income and checks coded as expenses. At year’s end, banks could report the totals to businesses and to the IRS—and begin making business income reporting almost as simple as wage and salary income reporting (and much closer in tax compliance as well).

“Trust, but verify” became President Reagan’s trademark phrase during his Cold War nuclear negotiations with Russia. America’s foe today is a mammoth deficit coupled with a $385 billion tax gap. Congress could slash the gap by slowly but surely bringing self-reporting taxpayers into a “trust but verify” system. Ronald Reagan would approve.


Copyright 2012 Gerald E. Scorse.

New York City-based Gerald E. Scorse helped pass the basis reporting bill. He writes articles on taxes.



Copyright © 2012 The Baltimore News Network. All rights reserved.

Republication or redistribution of Baltimore Chronicle content is expressly prohibited without their prior written consent.

Baltimore News Network, Inc., sponsor of this web site, is a nonprofit organization and does not make political endorsements. The opinions expressed in stories posted on this web site are the authors' own.

This story was published on April 04, 2012.

 


Public Service Ads: