Tax & Accounting News

The ever increasing tax gap and what it means to the US budget.

by
Lee Reams II
on
5/23/2017
The ever increasing tax gap and what it means to the US budget.

There is a lot of noise about tax reform and what changes might make it into law. One of the arguments for simplifying the tax code is to eliminate the "tax gap".

So what does closing the "tax gap" really mean?

According to the Government Accountability Office, the “tax gap” for 2016 was $486 billion. That is the estimated taxes that are due and not collected because of outright tax evasion and errors in tax preparation amongst others. According to the GAO 2012 report the "tax gap” does get smaller after late payments and enforcement considerations.

Regardless, in a government budget built on deficits, the White House argues that closing the loopholes will improve overall collections. Much of the blame in the GAO report is put on sole proprietors. According to the Office of Information and Regulatory Affairs and coverage by the Tax Foundation, it takes 8.9 billion hours to comply with IRS regulations and paperwork.

The White House budget official, Director Mick Mulvaney from the Office of Management and Budget (OMB) spoke about the ‘tax gap” during his May 23, 2017, press conference. Mulvaney stated there is “almost enough to close the deficit that year," Mulvaney said. "And we don't assume an additional penny of that being closed as part of our tax reform."

Mulvaney continued that the purpose of tax reform was to simplify the compliance process. Mulvaney added, “if you can really fill out your tax reform -- tax returns on a single piece of paper, you're much more likely to actually do it.”

Critics will argue that major changes in the corporate tax code for pass-through entities will actually increase the rate of tax evasion as taxpayers rush to shield income through business entities. Based on the current tax reform proposals, the Tax Policy Center predicts a 15% tax rate would cost $1.9 trillion over ten years. In this same report, an estimated 30 percent (or $584 billion) of the $1.9 billion in costs will come from high-earners reclassifying their income through pass-through entities. If correct, this number is actually larger than the current “tax gap” being reported by other agencies.

President Trump promised during the campaign “small businesses will benefit the most from this plan.” The debate is just heating up and so will the definition of what a “small business” is.

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Lee Reams II

Lee Reams II

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I am a tax and business news junkie who has spent the last 20 years developing and executing "best in class" word-of-mouth marketing campaigns for tax and accounting professionals. With TaxBuzz and CountingWorks we have taken that same commitment to quality content directly to the consumer. Keeping you up-to-date with the latest tax law changes, business growth tips and planning strategies to help you reach your best financial outcome.

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