Paulson Commits Faux Pas, Tells Truth About Tax Gap

Democrats on Capitol Hill are upset because the Treasury Secretary told the truth about the tax gap. Testifying before the Senate Finance Committee, Henry Paulson explained that there was very little chance of substantially closing the tax gap without resorting to onerous measures that would diminish freedom and penalize millions of compliant taxpayers. Paulson’s testimony is particularly refreshing since the IRS has been using the issue to seek a bigger budget and more power. The Washington Post has the story:

Treasury Secretary Henry M. Paulson said yesterday that the Internal Revenue Service would have a tough time wringing money out of the nation’s tax cheats without imposing “draconian” new burdens on honest taxpayers. Speaking to a Senate committee led by Democrats eager to raise cash without raising tax rates, Paulson said it was “unrealistic” for them to expect to collect hundreds of billions of dollars from the federal tax gap, the difference between taxes owed and taxes paid. …Democrats bristled at Paulson’s remarks and accused the administration of failing to take seriously its duty to enforce the nation’s tax laws. Finance Committee Chairman Max Baucus (D-Mont.) demanded that Paulson return in July with a strategy for increasing the voluntary compliance rate to 90 percent by 2017 from 84 percent, a change he said would increase tax collections by $150 billion a year. …Paulson said other tax-gap ideas floating around Washington “would be unnecessarily painful, expensive and time-consuming for taxpayers.” Politicians haven’t endorsed the more extreme notions, but Paulson cited some anyway – steps such as eliminating most cash transactions or tripling the number of IRS audits. “In theory, each of these measures could bring in some additional revenue,” Paulson said. “But the cost of compliance for individuals and businesses – most of whom already pay what they owe – would far outweigh the gains.”