US

Treasury says tax gap to balloon to $7 trillion over next decade, calls for beefed-up IRS

The Internal Revenue Service building in Washington.

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The Treasury Department estimates that the difference between how much Americans owe in taxes and how much they actually pay will balloon to $7 trillion over the next decade.

In prepared remarks, Deputy Assistant Secretary Mark Mazur told Congress on Thursday that the so-called tax gap will only worsen over the next several years without more funding from lawmakers. 

He added that the estimate of the gross tax gap is around $580 billion for 2019 alone.

“Over the coming decade, the gross tax gap is projected to total approximately $7 trillion, roughly 15 percent of all owed taxes,” Mazur told House lawmakers.

“A larger tax gap generates the following results: higher tax rates elsewhere in the system, lower revenues to fund the nation’s fiscal priorities, or higher budget deficits and larger amounts of federal debt,” he added. “Extensive and persistent non-compliance also undermines confidence in the fairness of our tax system.”

Mazur blamed the persistent and growing tax gap on insufficient funding for the Internal Revenue Service. The IRS budget has been reduced by 20% over the last 10 years, resulting in a raft of staff layoffs and a marked decline in audit rates.

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The tax collector said earlier this year that budget reductions forced it to cut 33,378 full-time positions between fiscal 2010 and 2020, including a significant number of taxpayer service and enforcement personnel.

The IRS has repeatedly warned that the layoffs undermine its ability to start and carry out audits that would help rectify the tax gap. While the number of millionaires has nearly doubled since 2012, tax audits dropped by 72%, to 11,331 in 2020, from 40,965 in 2012.

Mazur recommended lawmakers support provisions within the Biden administration’s fiscal 2022 budget that would help bulk up the service. 

The White House has currently proposed a sustained, multiyear funding stream of nearly $80 billion in resources over the next decade that the Treasury says would allow it to hire back staff. President Joe Biden has also proposed funds to upgrade IRS technology and improve information reporting via third-party reports.

The Treasury’s Office of Tax Analysis estimates that these compliance initiatives would raise about $700 billion in additional tax revenue over the next decade.

Mazur’s remarks came one day after five former Treasury secretaries ﹘ Lawrence Summers, Robert Rubin, Henry Paulson, Jacob Lew and Timothy Geithner ﹘ urged lawmakers in a New York Times op-ed to approve much of the Biden administration’s budget for the tax collector. 

“We are convinced that better information-reporting requirements can be designed that will permit significant increases in revenue collection without imposing any burden at all on taxpayers and imposing no significant increase in regulatory burdens across the economy,” the former secretaries wrote.

“Reasonable people can disagree on the magnitude of particular tax rate increases,” the quintet added. “But on this issue, all should agree, including members of Congress of both parties: Giving the I.R.S. the tools it needs to improve compliance will raise significant revenue and create a fairer, more efficient system of tax administration.”

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