Senate Budget Committee Hearings

The Senate Budget Committee hearings were held today --one of  a series of hearings on budget outlooks and related issues--on the so-called "tax gap".  That's the difference between the tax revenues collected and the amount that should be collected with full compliance.  One of the speakers was Robert McIntyre from Citizens for Tax justice, whose testimony is available at this link.

McIntyre set the stage with three key facts about the budget outlook:

1. for the last five years (FY 2002 through FY 2006), 25% of non Social Security outlays have been financed with borrowed money (counting money borrowed from Social Security for spending on other programs)
2. along with this increase in borrowing, there has been a "remarkable" decline in personal income tax revenues--from more than 10% of GDP in FY 2000 to only 7.3% of GDP in FY 2002--
3. while much of the decline is due to the huge revenue reduction bills passed over the last five years, some significant part of the shortfall in tax revenues is due to tax cheating--as much as 300 billion annually and probably even more--"led by the accounting firms, banks and lawyers that now make billions of dollars a year facilitating tax evasion and avoidance."

So what's the government to do (if it won't take the responsible action and raise taxes to satisfy legitimate government needs)?  IRS Commissioner Everson thinks there's an easy $50-100 billion a year that could be collected from tax cheats if the IRS only had the resources.  Avi-Yonah and Guttentag suggest another $50 billion of the tax gap related to evasion in the international area could be "eliminatated overnight" with certain policy changes.

Citizens for Tax Justice thinks there are already some good ideas floating around, including ones suggested at hearings held by Carl Levin and Norm Coleman last year.  Here's some of the easy ones.

1. presumption of US control for offshore trusts and shell corporations
2. disclosure by publicly traded companies and company insiders of any offshore holdings of their stock by company directors, officers or large shareholders
3. "independent" offshore entities related to a company director, officer or large shareholder treated as an affiliate
4. sanctions on uncooperative offshore tax havens
5. repeal deferal/exemption of taxes on profits earned by US-owned foreign corporations (and end the tax incentive to move US jobs to low-tax foreign countries)
6. replace transfer pricing system with formula allocation
7. require information reporting on capital gains
8. clarify economic substance--but, as McIntyre says, with a strong enough rule that disallows any scheme for which tax avoidance is the primary purpose of the transaction
9. clarify that S corporation owners cannot avoid self-pemployment taxes on their earnings
10. increase penalties for facilitators of tax evasion
11. increase IRS funding--the budget has been slashed by "more than a fifth" since 1994, and enforcement staff have declined by 36 percent and audit rates have declined while the number of returns have jumped

Why is more enforcement staff needed at the IRS?  It's worth quoting a full paragraph from McIntyre's testimony on that issue.

[T]he New York Times reported on January 17, 2007 that a survey of 50 IRS corporate auditors found that every one felt that "large companies were being allowed to pay far less than they owed" in taxes due to insufficient IRS resources to fully pursue cases.  "It's catch and release," one auditor told the Times, about how little tax-cheating corporations were forced to pay when their illegal activities are detected.  "They are giving away the store," another auditor complained.

This is important, and Congress should listen.  It's time to turn the tide that has permitted aggressive reporting positions by increasing enforcement staff and significantly increasing real audits.  Congress can even do just three of the items suggested by McIntyre--fund IRS enforcement activities, eliminate the "deferral" provisions in the international tax area, and require reporting of capital gains--and make a substantial dent in the tax gap.  So let's see if this "new" majority Democratic Congress has the spine to take these needed steps, or will they cave to the highly influential, well-monied business lobby yet again.....

(Thanks to my colleague Mike McIntyre for bringing the hearings to my attention.)