Wednesday, July 30, 2008

Stimulus or Stepped-up Tax Collection?

On February 13, 2008, President Bush signed the $168 billion stimulus package enacted by Congress. Democratic presidential candidate Barack Obama said on July 28, 2008, that an early act of an Obama administration would be an additional stimulus package, as much as $100 billion. The large projected budget deficits for the current and next fiscal years are attributable, in part, to the February stimulus package.

At the same time that Congress and the president are putting money in the hands of Americans to promote consumption and economic activity, the General Accounting Office reported new details on the federal tax gap—the amount of outstanding taxes owed by businesses and individuals. The purpose of the report is to recommend methods to collect unpaid taxes.

As of September 30, 2007, the federal tax gap due to unpaid individual and business taxes amounted to $282 billion. Of that, over 1.6 million businesses owed $58 billion in unpaid (not remitted) federal payroll taxes, including penalties and interest. Other unpaid business taxes totaled $50 billion, of which about half is corporate income taxes.

To the extent that the Internal Revenue Service succeeds in reducing the tax gap, it will vitiate the intent of the stimulus package and any future stimulus packages. The federal government needs to make up its mind. Should it hand out money and increase the deficit or try to collect unpaid taxes and reduce the deficit?

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