The New York Times reports that small business owners are up in arms about the Bush Administration’s proposals to attempt to close the tax gap, which according to the IRS has three components, nonfiling, underreporting, and underpayment, and which the IRS estimated to be more than $300 billion in 2001.
The IRS’s analysis (see the link above) shows that the largest component of the tax gap is underreporting, which includes unreported income, improperly claimed deductions and credits, and overstated expenses. Now those of us working for the Man can’t really underreport our earned income, since the Man provides the government with a copy of our W2s. And while big public companies undoubtedly engage in what I charitably might call tax minimization, they use various complex legal strategies–Microsoft isn’t the kind of business that, say, sells its products for cash only.
So who is responsible for the tax gap? Again the IRS data show that it is individual filers, not corporations, who are responsible, and that their biggest sin is failure to report income. We’re talking about small business owners here–the contractor who gets paid under the table, the illegal alien who works off the books, etc.
For once, the Bush Administration has a tax idea that makes sense–raise revenue by actually collecting the tax due. Promote compliance by requiring small businesses to report credit card transactions in more detail and report payments over a certain amount. All of this sounds eminently reasonable, given that the tax gap per year is more than half of the cost of the Iraq War to date.
So I don’t have much sympathy for the small business owners who are whining about the burden of compliance with the proposed law. We’re at war, and we need the money.
Congress, make it happen.