Paulsen: Closing "Tax Gap" Not Child's Play

Treasury Secretary Henry Paulsen testified this week before the Senate Finance Committee and emphasized simplification of the tax code and enacting Treasury legislative proposals,which he said included a dozen approaches to reduce the tax gap with minimal pain to taxpayers. Paulson said that a major cut in the tax gap would require draconian rules on all taxpayers and that the tax gap could not be looked at as a spendable "pot of gold." Paulsen was particularly critical of requirements where taxpayers provided 1099s to service providers and eliminating cash transactions for electronic transactions with credit cards having major new reporting requirements. All the same, Chair Max Baucus (D-MT) demanded that the Treasury develop a plan to improve tax compliance from 84% to 90% in the next 10 years, claiming that this would provide an additional $150 billion annually.

I certainly can understand the desire to reduce the tax gap, both from a revenue-raising and a horizonatal equity standpoint. Nevertheless, measures which make Americans feel like they are tax gatherers will meet with resistance and DAMAGE voluntary tax compliance. Paulsen's simplification strategy sounds to me like the strategy with the best chance of cutting the tax gap.