Wednesday, February 6, 2008

Stimulate the Economy or Close the Tax Gap?

The president and Congress are on the verge of enacting a "stimulus package" in the neighborhood of $150 billion. It includes sending checks to taxpayers who earned less than $175,000 last year, possibly to Social Security recipients and veterans, accelerated depreciation for small business, and other benefits. The underlying belief is that putting money in the hands of people who are likely to spend it will increase demand, stimulate production, and create jobs.

Meanwhile, the White House and Congress appear likely to agree on a 4.3 percent increase in the budget of the Internal Revenue Service in order to close the "tax gap." The tax gap, the difference between what taxpayers owe the federal government in taxes and what the federal government collects, is estimated at $290 billion. A new measure includes stricter requirements for brokerage houses and other financial institutions to report what investors pay for stocks and other securities to the IRS, stricter enforcement of existing laws, increased audits, and increased penalties on those who willfully fail to file tax returns.

It took three years, from 2004 through 2006, to collect an extra $10 billion through stricter enforcement. A further $10 billion was raised in 2007, bringing the four-year increase to $20 billion. Closing the tax gap has been a priority of Congress and the IRS for many years. If the IRS makes significant progress in narrowing the tax gap, every additional dollar collected in taxes offsets, one-for-one, every dollar sent to taxpayers to stimulate the economy. Wouldn’t it be truly ironic if the IRS succeeded in cutting the tax gap in half during the next fiscal year!

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