Nov 16 2013

The tax gap: The price of our two-party political system


Reform Party of California Commentary

The net tax gap is the amount of tax money that individuals and businesses owe but never pay to the U.S. treasury. The net tax gap arises from tax evasion, which is illegal non-payment of taxes. Each year the treasury does not collect about $430 billion that is owed. It is reasonable to believe that intelligent tax code reform and/or increasing tax law enforcement by the IRS could reduce the net tax gap by about 80% in an economically efficient way. That would bring an additional $344 billion into the treasury without imposing any new tax burdens.

Given America’s large and growing federal debt, one would naturally assume that recovering such a large amount of money would be subject to intense congressional interest and focused action. Unfortunately, there is neither intense interest nor focused action to fix the problem. In fact, congress has essentially no interest in this topic.

The Reform Party of California (RPCA) considers the net tax gap to be an intentional creation of the two party system. It arose from the influence of a few factors, primarily special interest money and political self-interest. If it chose to do so, congress could increase enforcement of tax laws and reduce the net tax gap. The fact that congress chooses to do nothing is solid factual evidence, not opinion, that congressional politicians in both parties condone or approve of the situation. More evidence of strong bipartisan support for a massive annual tax gap includes the fact that it has existed for years with no significant congressional effort to change the situation. The tax gap is just the cost of doing routine business in the two-party system and thus it is not seen as a problem that needs to be fixed. That cost of doing business probably imposes a drag on annual U.S. GDP growth of at least 0.4%.

The fact and logic basis for these conclusions is provided below.


America’s net tax gap for 2006 was estimated at about $385 billion.[1] Extrapolating from historical growth, it is reasonable to assume that the net tax gap is now running at about $420 to $440 billion/year, although some estimates are higher.[2] Creation and maintenance of the tax gap arises as a part of two-party political business as usual.[3] Allowing hundreds of billions of tax dollars to go uncollected each year serves no obvious economic purpose other than to feed the insatiable demands for cash by both political parties and most of their politicians. In return for preventing enforcement of tax law, congress provide a way for campaign contributors to recoup a return on their investment.

Everyone involved in paying and receiving campaign contributions vehemently argue that there is nothing wrong with the practice and that it has no adverse effects on anything. Both political parties argue that and so do their financial supporters. The federal courts back that up by holding that spending money in politics is constitutionally protected free speech. Despite solid support for the practice by the two-party system, including the U.S. supreme court, many Americans feel that special interest money creates the appearance, if not the reality, of political corruption.[4]

In addition to facilitating tax evasion, the tax code contains tens or hundreds of billions in legal tax breaks that add little or nothing to the American economy or its competitiveness. Tax compliance consumes 6.1 billion hours/year by one estimate.[5] Tax law drives much behavior that is focused on tax breaks and nothing more. For most of that activity, little or nothing is accomplished other than transfer of wealth to tax break recipients, including tax cheats. The sheer size and complexity of the tax code makes it the perfect place to reward donors for campaign contributions while providing legislators with cover. The National Taxpayer Advocate has warned Congress for years that both IRS underfunding was irrational (wasteful) and poor tax compliance was a serious issue.[6] Congress simply ignored the warnings.

Given its complexity and size, over 74,000 pages, no one fully understands the tax code or how it works. Unfortunately, the press is incapable of remaining focused on taxes long enough to make this a significant mainstream topic. In addition to that, many Americans have lost faith that congress could even address the issue in a fair and even-handed manner, assuming the supreme court will allow any monetary restrictions on political spending. The current supreme court climate suggests that additional campaign finance laws are about to be largely or completely obliterated.

In America’s two-party system of politics, most or all issues of importance are arguably dominated by a variable combination of three key factors, ideology, special interest money and politician and party self-interest. The impact of those factors is easy to see in America’s annual net tax gap because there is no economic reason for an advanced country to allow years of tax cheating on such a massive scale. The most plausible explanation for the situation is simple: Congress relies on massive tax cheating as the quid pro quo to keep money flowing to politicians and both parties. That lost revenue is the price taxpayers pay for politics as usual in a two-party system that is arguably more focused on serving itself than on serving the public interest.


1. GAO report summary: http://www.gao.gov/products/GAO-12-651T.

2. Reduced IRS tax law enforcement budget: http://www.taxanalysts.com/www/features.nsf/Articles/752BB7D7CEF19A4085257B470061CC69?OpenDocument; http://www.dailykos.com/story/2013/05/13/1208905/-Here-s-how-the-IRS-scandal-could-cost-Uncle-Sam-billions.

3. Links: http://www.nytimes.com/2006/02/15/business/15tax.html?_r=0; http://online.wsj.com/news/articles/SB10001424052970204331304577145011282034708; http://reformpartyca.org/politics-and-special-interest-money/.

4. Public opinion on special interest money, appearances of corruption and trust in politics: http://www.people-press.org/2001/03/27/why-americans-arent-stirred-by-campaign-finance-reform/; http://big.assets.huffingtonpost.com/cftoplines_split1.pdf; http://thehill.com/blogs/ballot-box/campaign-ads/264087-poll-majority-want-corporate-money-out-of-politics; http://www.gallup.com/poll/163208/half-support-publicly-financed-federal-campaigns.aspx; http://politicalticker.blogs.cnn.com/2011/06/09/cnn-poll-two-thirds-say-elections-are-usually-for-sale/; http://i2.cdn.turner.com/cnn/2011/images/06/09/rel10d-2.pdf.

5. Tax compliance links: http://www.taxpayeradvocate.irs.gov/Media-Resources/Press-Release; http://www.forbes.com/sites/janetnovack/2011/01/05/tax-waste-6-1-billion-hours-spent-complying-with-federal-tax-code/.

6. In January of 2013, National Taxpayer Advocate, Nina E. Olson delivered her annual report to congress (http://www.irs.gov/uac/Newsroom/National-Taxpayer-Advocate-Delivers-2012-Annual-Report-to-Congress). She pointed out that underfunding the IRS makes no sense because the IRS “serves as the de facto Accounts Receivable Department of the federal government. Each dollar appropriated for the IRS generates substantially more than one dollar in additional revenue.” She also argued that tax code complexity “undermines trust in the system”, making tax evasion worse because honest people believe that the system is not fair. It is reasonable to believe that in January of 2014, Ms. Olsen will give about the same warning to congress and that congress will ignore its annual warning, just like it did in 2013 and in the years before. When it comes to Congress, nothing compelling argues that they have any goal in mind other than protecting their self-serving two-party system.