Do-it-Yourself Tax Cuts: The Crisis in U.S. Tax Enforcement

Publication Date: April 2005

Publisher: Economic Policy Institute

Author(s): Max Sawicky

Research Area: Banking and finance

Type: Brief

Abstract:

According to the latest estimates, as much as $353 billion in taxes--16% of the total owed--went unpaid in 2001. If we ranked states in order of aggregate individual income tax liability, this "tax gap" would far exceed total federal taxes paid by the residents of any single U.S. state and the total taxes paid by all 29 states combined with the lowest total tax liability.

More importantly, recovery of unpaid taxes would eliminate the bulk of projected federal budget deficits over the next 10 years. Burgeoning budget problems (Sawicky 2005; Price and Sawicky 2004) and the associated difficulties of enacting tax increases make closing the tax gap a salient political issue and an important policy priority. Indeed, one reason to resist tax increases is the knowledge that many others are escaping their own tax obligations.

This Briefing Paper provides an overview of what a former commissioner of the Internal Revenue Service (IRS) calls "the crisis in tax administration" (Aaron and Slemrod 2004), and it discusses some remedies to address this problem. Because this Briefing Paper aims to provide a non-technical overview of the topic, citations have been kept to a minimum. Data on the tax gap are from the IRS (2005). The benefit/cost ratios of assorted enforcement measures are from Plumley (1996; 2004). Information on the IRS workload, audit rates, and funding is from Rossotti (2004), Burman (2004), and the IRS (2005). Some of the most recent research on tax enforcement can be found in Aaron and Slemrod (2002).