Friday, April 15, 2005

Revisiting the Tax Gap on Tax Day

For you international readers, today is the deadline in the U.S. for filing individual income taxes with the federal government (and most state governments). Unlike many countries, the U.S. tax system is mired in a bog of multiple tax forms, write-offs, and regulations, requiring even individuals with little tax calculation to spend hours completing forms in accordance with annual changes in the tax code (for a not-so-fun trip through bureaucracy Americana, visit the Internal Revenue Service and download some forms). But, on top of this, we also have a pronounced shortfall in expected tax revenues - especially business taxes - at the same time that commerce spokespersons becry the lack of a "favorable" business climate in one of the world's most open market economies. This week's snapshot from the Economic Policy Institute contains the sordid details.

The latest research from the Internal Revenue Service puts the amount of taxes owed but not paid "voluntarily and timely"--also known as the "tax gap"--at $353 billion, or about 15% of total taxes owed. The U.S. tax system depends in great part on voluntary compliance. The extent of such compliance in the United States compares well with other countries, but this asset is in danger of being squandered by inadequate tax enforcement. Failure to enforce the law encourages greater evasion, and increased evasion puts a greater burden on enforcement, contributing to a vicious circle that increases the tax gap.

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