May 3, 2016
A new article from our friends at The Daily Signal explains the “tax gap,” a symptom of an ungainly tax code, a staggering federal bureaucracy, and the inability of big government to oversee its own operations.
In an ideal world the federal government would collect all of the taxes that it was owed–and then spend only what it intended to. Unfortunately, things aren’t that simple.
Instead, every year we have a “tax gap,” which is the difference between what the government believes it is owed, and what it actually takes in, and “improper payments,” which refers to the government sending money to those it doesn’t mean to (paying benefits to deceased persons, for example).
The tax gap and improper payments serve as reminders that the federal government is not very good at administering complex programs.
The article goes on to explain the tax gap:
There are two types of taxpayers that contribute to the tax gap. There are willful tax evaders, who knowingly underreport their income or overstate their deductions, and there are taxpayers that make errors on their tax forms accidently. As the tax code has become increasingly complex, both voluntary compliance and enforcement have become ever more difficult. Even the IRS admits that “the complexity of the tax code makes the tax law too difficult for taxpayers to understand and for the IRS to administer.”
It also explains several possible remedies, including a flat tax:
A flat consumption tax would also reduce the tax gap and ensure that people pay the correct amount of taxes. The simplicity of a flat tax would help taxpayers understand and voluntarily comply with the tax code and limit opportunities for tax evasion. A flat consumption tax would stimulate the economy and reduce the tax gap, all without affecting the overall distribution of the tax code.
Since the nation’s massive, and growing, entitlement programs account for so much of the tax gap, The Daily Signal also proposes entitlement reform as another remedy:
One possible solution is to shift both Medicare and Medicaid to premium support payment systems. Fraud is less pervasive under a premium support model because money wasted directly hurts the health insurer’s bottom line. This creates a strong economic incentive for health insurers to identify and eliminate fraud and abuse. If Medicare and Medicaid were transformed into premium support programs, it would put them on a more sustainable fiscal path, increase the quality of care that beneficiaries can access, and reduce fraud and abuse within these programs.
Read the full article here.