Newspaper logo  
 
 
Local News & Opinion

Ref. : Civic Events

Ref. : Arts & Education Events

Ref. : Public Service Notices

Travel
Books, Films, Arts & Education

09.15 James Heckman: Early Interventions Lead To Higher IQs [20:30 video]

09.12 Millennials Are Out-Reading Older Generations

Letters
Open Letters:

Ref. : Letters to the editor

Health Care & Environment

09.15 Sun and Wind Alter Global Landscape, Leaving Utilities Behind

09.15 Emma Thompson: 'It's a different patch of life, your 50s'

09.14 Full Show: Climate Change — Faith and Fact [25:15 video]

09.14 Naomi Klein: the hypocrisy behind the big business climate change battle

09.13 The Way to Beat Poverty

09.13 Brain Trauma to Affect One in Three Players, N.F.L. Agrees

09.12 What We’re Afraid to Say About Ebola

News Media

Daily FAIR Blog
The Daily Howler

Justice Matters

09.12 Sixteen Female Senators Pressure NFL to Adopt Zero-Tolerance Domestic Violence Policy

09.12 Rape Culture in the Alaskan Wilderness

09.12 Men involved in Malala Yousafzai shooting arrested in Pakistan

US Politics, Policy & Culture

09.15 Home Free?

09.15 A Bigger Midterm Election Turnout

09.14 More Americans Speak in Tongues

09.12 Why co-ops are the future of the American economy

09.12 Arab States Sign On to Fight ISIS; European Allies Not So Sure

09.12 The Midterm Electorate Is Anxious and Unsettled

09.12 The Pentagon’s $800-Billion Real Estate Problem

High Crimes?
Economics, Crony Capitalism

09.15 Letting the Rich Take All The Money

09.15 The TTIP deal hands British sovereignty to multinationals

09.10 However Useless, Economic Development Incentives Are on the Rise

09.10 Low Wage Growth, High Long-Term Unemployment Recognized as International Problem [charts]

09.09 If Your Kids Get Free Health Care, You’re More Likely to Start a Company

09.09 Harvard survey: US wealth gap is "unsustainable"

International

09.15 Earth: 248 armed conflicts after WW2; US started 201 (81%), killing 30 million so far. Arrests are when now?

09.15 Bombs won’t solve the Isis problem

09.15 Israeli refuseniks will be treated as criminals, says defence minister

09.14 The Pornography of Jihadism

09.14 What’s Their Plan?

09.14 Kerry Scours Mideast for Aid in ISIS Fight

09.13 Scotland's Democratic Revolution

09.13 Veterans of Elite Israeli Unit Refuse Reserve Duty, Citing Treatment of Palestinians

09.12 Obama Urges War in Iraq Despite Known Lack of WMDs

09.12 Living Simply in a Dumpster

09.12 Is ISIS Stalling NSA Spying Reform?

09.12 Arabs Give Tepid Support to U.S. Fight Against ISIS

09.12 'Boris' the robot can load up dishwasher

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: