State Revenue Departments and IRS (Data) Dig for Dollars

More and more states, and increasingly the IRS, are using a technique called data mining to determine if taxpayers are underreporting tax liabilities. Examples of results obtained by data mining: Texas receiving $5 million in back taxes on out-of-state purchases of private aircraft; California raised an additional $180 billion annually. Moreover, revenue agencies are becoming more aggressive in mining--once limited to tax returns, tax authorities are now cross-checking with other governmental agencies and, for some states, with commercial sources such as infoUSA. Future projections include governmental searches of business purchasing records and even credit card statements; a trend which understandably worries civil libertarians (not to mention economic libertarians for other reasons).

Clearly and understandably, the US Department of the Treasury and state Tax Departments are concerned about a perceived tax gap. A tricky balance ensues: what level of pursuit of tax dollars is acceptable from aggressive and even evading taxpayers? An additional question: would a consumption tax help from the standpoint of reducing the tax gap or hurt from the standpoint of encouraging greater intrusiveness in governmental data mining?