Our country is on a perilous financial path. At the start of this century the national debt was approximately $6 trillion. Today, a mere 20 years later, it stands at $27 trillion and is rapidly rising. Large tax cuts, two wars in Iraq and Afghanistan, a financial crisis and the economic devastation resulting from the COVID-19 pandemic have conspired to bring our national indebtedness to its current elevated level.
And the outlook is still highly uncertain. While the prospect of a return to normalcy, given the development of vaccines, is encouraging, it is too early to project how much additional government spending will be required to bring needed help to millions of Americans.
Moreover, the rapidly accumulating national debt doesn’t begin to take into account the level of investment leaders of both political parties see as necessary for the country to achieve its full potential. Health care, public education, and our seriously inadequate infrastructure are all areas that require substantial investment. Paying for these critical needs with the national credit card needs to stop.
The incoming Biden administration has proposed a series of targeted tax increases to begin to deal with the country’s increased financial burden. While not affecting individual taxpayers making less than $400,000 annually, the Biden proposal would reverse significant portions of the Trump tax cut of 2017 affecting corporations and high income individuals. However, it is far from certain that the incoming administration will be successful in convincing Congress to enact any significant tax increases.
The nation is therefore confronted with a serious, seemingly intractable, financial dilemma. This is why the recent work of former high-tech executive and a past commissioner of the IRS, Charles Rossotti is of such enormous importance. While the Internal Revenue Service has long known that there was a significant amount of tax revenue that was legally due but not paid, Mr. Rossotti’s research and analysis, published in a series of tax journal articles, has put the spotlight on the following issues:
- In 2019, the federal government failed to collect $574 billion of taxes that were legally due but unpaid. This is more than all income taxes paid by 90% of all individual taxpayers.
- This so-called “tax gap” is occurring because a rapidly increasing portion of business income is generated through partnerships and other forms of business enterprise, for which revenue is largely unverified and which receive very little attention from the IRS.
- Over the past 25 years, White House administrations and Congresses of both parties have steadily cut the IRS, reducing enforcement resources by 28%, while tax returns have increased by 31%.
- Underreporting of income, largely business income, has the effect of benefiting higher income individuals, which widens income inequality and is unfair to lower income individuals whose income is accurately reported for tax purposes.
Mr. Rossotti has laid out a detailed plan outlining how, with a modest amount of increased business income reporting, broadened use of existing technology, and increased staffing of the IRS, the “tax gap” of nearly $600 billion annually and $7.5 trillion over 10 years, can be reduced by 20% to 25% — or approximately $150 billion per year.
This increase in tax revenue is roughly equivalent in magnitude to the tax increases contemplated in the Biden administration proposals, and while congressional action would be needed to support the additional IRS staffing and investment in technology, it is estimated that the results of these efforts would generate a 25:1 return on investment.
It is important to emphasize that the Rossotti proposals contemplate no “tax reform” or changes in tax policy. Rather, they rely on sensible, practical, common sense strengthening of our tax compliance system so that taxes that are legally due under current law are actually paid. His proposals are described in detail on the website (shrinkthetaxgap.com). It is hard to imagine how any government official of either political party could possibly object to pursuing these proposals. To do so would be tantamount to endorsing continued tax cheating on a massive scale.
It is up to each of us as taxpayers and concerned citizens to demand action on this important issue.
Alexander R.M. Boyle (firstname.lastname@example.org) is retired vice chairman of Chevy Chase Bank.