A Stitch in Haste

For many years now I have trekked every March to my parents' home to do their taxes. Call me "The Prodigious Son."

This ritual began after I accompanied my father one year to a tax preparation professional ("TPP") and witnessed the following conversation:

TPP: "How much in charitable contributions?"

Dad: "None."

TPP: "Okay, so we put down $250."

Me: "Excuse me?"

TPP: "They ignore anything up to $250."

Me: "So your professional advice to my father is that he commit tax fraud?"

TPP: "Exactly."

Ever since, I have been the TPP in the family.

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Armed with that, consider this:

House and Senate Democrats say the government could collect as much as $100 billion more a year by whittling the tax gap — the unpaid taxes, mostly on unreported earnings, that the I.R.S. estimated was about $300 billion a year.

But the Treasury Department, which oversees the I.R.S., says it cannot realistically recover one-tenth as much as Democrats suggest.
...
Representative Charles B. Rangel, Democrat of New York and chairman of the Ways and Means Committee, has cited the tax gap as a top priority for increasing revenue, ahead of any discussion about rolling back President Bush’s tax cuts.
...
"The tax gap is the logical place to go," said Representative Rahm Emanuel, Democrat of Illinois and chairman of the House Democratic Caucus.

Here's what's fascinating about this War on the Tax Gap: It's being waged by Democrats.

Democrats claim to care about the working poor, small businesses and the "middle class" more than Republicans do. Yet it is precisely the working poor, small businesses and the "middle class" who commit tax fraud.

Consider:

--Who is more likely to work off the books to avoid income tax: a low-skilled worker or a Fortune 500 CEO?

--Who is more likely to employ that off-the-books worker: a family business or that Fortune 500 company?

--Who is more likely to structure his employment as an independent contractor in order to evade FICA taxes: a blue-collar tradesman or a white-collar professional?

--Who is more likely to "cook the books" (especially in a post-Sarbanes-Oxley world): your neighborhood pizzeria or McDonald's?

--Who is more likely to engage in unreported barter transactions: middle-class families or super-rich families?

--Who is more likely to report a phantom $250 in charitable contributions: my father or Bill Gates?

Again: The tax gap is created by the very people the Democrats claim to represent better than Republicans — so why has this issue suddenly become a Democratic issue? "PAYGO" is part of the answer to be sure, but it's also the fact that many people, especially many Democratic voters, have the mistaken view that the tax gap reflects the class warfare that so many liberals seem to embrace: It's easy to believe, incorrectly, that the tax gap is "the fault of the rich." So of course Democratic politicians will embrace it as an issue to be "fixed."

Meanwhile, the solution to the tax gap is not greater enforcement, but lower tax rates. Remove the incentive to under-report, or to commit flat-out tax fraud, and its incidence will decline.

Stated differently, just as taking care of tax levels will take care of tax simplification, so too would taking care of tax levels in turn take care of the tax gap.

More thougths from LLP.

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In related news, Democratic hopeful John "Two Americas" Edwards had something particularly stupid buried in his generally stupid call for — what else? — more taxes on the rich, in this instance to pay for socialized medicine:

Mr. Edwards said he would also offset the program's cost by using the estimated $15 billion in capital gains taxes that go uncollected each year by requiring brokerage houses to report capital gains from taxpayers' stock sales to the Internal Revenue Service, just as interest and dividend income is reported now.

Just one problem: Brokerage firms already report proceeds from the sale of securities, in what's called a 1099-B. Granted, it's not quite the same as reporting capital gains (a net number, whereas the 1099-B is a gross number), but it's still reported, and switching from one number to the other (not a costless proposition to the brokerage firms) would presumably not change the incentive/penalty structure for reporting, or not reporting, realized capital gains. Which of course doesn't stop Edwards from suggesting it, in the name of class warfare, which was his rallying cry in the 2004 campaign and will be again in the 2008 race.