Just improving IRS collection won't vastly boost revenue

Posted: May 16, 2007 5:31 PM
Just improving IRS collection won't vastly boost revenue

Ever worry about the long arm of the IRS? You're not alone. Just ask Sen. Max Baucus, the Democratic chair of the Senate Finance Committee.

According to the Wall Street Journal, twice in recent years the Montana lawmaker "has made mistakes on local property taxes that led to late payments and fines."

Now, this isn't an attempt to gloat at another man's misfortune. As Barrett Kaiser, a Baucus spokesman, told the newspaper, "Every year, millions of Americans struggle as they sit down at kitchen tables to file their taxes." And he's right. We all make mistakes.

But the problem is that Baucus has -- at least until now -- been a proponent of making the federal government even more intrusive. He wants to narrow the "tax gap," the difference between what the IRS estimates it is owed and what it actually collects. "This nation should commit itself to achieving the goal, before the decade is out, of having at least nine out of 10 taxpayers comply with the law," the senator said at a hearing last month.

We're already close to that number; 84 percent of Americans pay what they're supposed to. Still, the IRS says it's collecting about $290 billion less than it's owed.

However, even the IRS admits that many of those who underpay do so not because they're trying to cheat the system, but because of "tax law complexity, extensive record keeping and regulatory requirements." The system is too difficult to understand.

Sadly, any attempt to close the tax gap would just make the system even more intrusive, because the most effective way for the IRS to close the gap is to get more information about our everyday activities.

The reason: Tax compliance is highest when an employer withholds taxes and sends that money directly to the IRS. In real life, this could require ordinary Americans to become tax collectors.

For example, Washington might force you to withhold taxes from the plumber who makes repairs in your home, get a W-4 from your teenaged babysitter and report the name, date of birth, address and taxpayer ID number of your barber.

The Tax Foundation estimates Americans spent billions of hours and $279 billion filling out their federal income taxes last year alone. Now imagine how high that bill would go if we also had to comply with myriad new paperwork and financial burdens that tax withholding would require.

So, is there an easier way? Suppose the government simply hired more IRS agents to look for tax avoiders. Well, the IRS' enforcement budget has been increased by 50 percent since 2000, yet there's been little effect on the revenues collected.

There's no magic bullet here.

As Treasury Secretary Henry Paulson told Congress recently, "When I look at what needs to be done, I concluded that there is not a pot of gold to pay for AMT, to balance the budget, whatever, unless we sign on for specific reporting provisions, increased reporting that I would recommend against."

The federal tax code is 17,000 pages, and too complicated for even those who wrote it. A Heritage Foundation survey of Hill offices concluded that only 22 out of 535 lawmakers filled out their own returns last year. Even the IRS commissioner has a tax accountant. And look where all that confusion got Baucus.

Instead of trying to close the "tax gap," it's time to have a simple and fair flat tax -- all income taxed at one low rate with no deductions. We deserve a system everyone can understand and comply with.