Sunday, April 22, 2012

If only tax collection was as efficient as the Food Stamp Program

This time of year, we are reminded of the pain of filing and paying least some of us are.

Each year scofflaw Americans skip out on hundred of billions of dollars in potential federal tax revenues. This noncompliance includes under-reporting income on tax forms, under-paying taxes that are filed and owed, and not filing at all. When the IRS last studied this issue in 2006, it found that $450 billion went unpaid because of noncompliance. Although the IRS was able to recover some of this, $385 billion, a seventh of all potential tax receipts, was never paid.

Noncompliance is grossly unfair, as some Americans pony up the money that they owe, while others get away with a lower effective tax bill or no taxes at all.

Noncompliance also adds to the deficit. Assuming that the noncompliance rate has remained about the same since 2006, unrecovered noncompliance will rob the treasury of more than $400 billion, which works out to just under a third of this year's projected federal deficit.

In testimony before Congress on Thursday, the GAO recommended a number of steps that Congress could take to reduce noncompliance, including
  • restoring funding to the IRS so that it could improve services to taxpayers, increase enforcement, and modernize its computer systems,
  • changing IRS practices to check taxpayers' compliance before issuing refunds, and 
  • simplifying the tax code.
Perfect compliance isn't feasible. Suppose, however, that Congress set the modest goal of making tax collection as efficient as the much-maligned Supplemental Nutrition Assistance Program (SNAP, formerly the Food Stamp Program).

The estimated over-payment error rate for SNAP in FY 2010 was 3.05 percent, or less than a fifth of the tax non-compliance rate. Improving tax compliance to the SNAP level would bring in $325 billion this year, enough to pay for the entire federal costs of the SNAP more than four times over.

Even a single percentage point increase in tax compliance, from its currently level of about 86 percent to 87 percent, would bring in nearly $30 billion.

If Democrats and Republicans are truly interested in closing the deficit, they could properly fund the IRS and give it some the tools it needs to improve tax compliance. Alternatively, they could put the USDA in charge.