February 10, 2009

February 10, 2009 | Commentary on Taxes

Closing the Tax Gap

Ever heard of the "tax gap"? It's the difference between what all of us owe the federal government in taxes each year - and how much, due to errors or cheating, the government actually collects.

Sen. Max Baucus, Montana Democrat, chairman of the Senate Finance Committee, has long sought to reduce the tax gap, estimated at about $350 billion annually. And, working with Sen. Charles Grassley of Iowa, the senior Republican on the committee, it seems he has finally succeeded - by vetting the elites nominated by President Barack Obama for positions in his administration.

The size of the gap is debatable. But no one disputes it's a significant amount, that policymakers should seek to close it, and that the surest way (until now, at least) to whittle it down is to simplify the tax code. It's important to assure those who do pay their full share under the law that others are doing likewise. It's especially important that American taxpayers are confident their political leaders are paying their fair share.

Which brings us to President Obama's nominees. He put forward Tim Geithner to be treasury secretary, and Mr. Geithner suddenly paid $34,000 in taxes owed from previous years. One hopes his tax check cleared the Internal Revenue Service before he was sworn in to head the department responsible for the IRS.

A few relevant facts about the Geithner tax foibles are plain: He acknowledged he owed the taxes for 2003 and 2004 and paid them long ago. But he also owed back taxes and interest for 2001 and 2002 - although the statue of limitations on that liability lapsed because the IRS, for some reason, didn't assert that Mr. Geithner committed fraud by knowingly failing to pay the tax.

As soon as it became clear he would be nominated, Mr. Geithner paid the lapsed taxes, admitting through his own actions that his previous failure to pay, while legal, was wrong. The issue was clear enough, and the failing great enough, that Sen. Robert Byrd of West Virginia, Democratic dean of the Senate, voted against his president's nominee for treasury secretary in the middle of an economic crisis.

Then along comes former Democratic Senate Majority Leader Tom Daschle. President Obama nominated Mr. Daschle to serve as secretary of the Department of Health and Human Services and as the nation's "health policy czar." Surprise, surprise: Faced with the thorough vetting process of the Baucus-Grassley Senate Finance Committee, Mr. Daschle, it turns out, failed to pay $140,000 in taxes for work since he left the Senate.

Mr. Daschle reportedly earned $5.2 million over the last two years, so he can hardly plead poverty. He also made a career of arguing for higher taxes for everyone else. Indeed, he presciently condemned himself on the Senate floor in 1998: "Make no mistake. Tax cheaters cheat us all, and the IRS should enforce our laws to the letter."

Mr. Daschle made a big mistake, and he paid for it -- not just in taxes and penalties, but in having to withdraw from consideration for his dream job. And he is not only nominee to crash in tax flames. The same day, Nancy Killefer had to withdraw as a high-profile nominee to be chief performance officer at the Office of Management and Budget over a still-undisclosed tax gaffe relating to payroll taxes on her household help.

President Obama's tendency to nominate reformed tax cheats sends a disturbing signal to taxpayers -- one likely to have a corrosive influence on tax compliance. As a political matter, it affirms a common perception that liberals are prone to a "do as I say, not as I do" mentality.

Yet something good can come of this. These nominations have shown we can make significant inroads on the tax gap. All we need to do is greatly expand the ranks of administration appointees subject to Senate Finance Committee vetting.

Think of how the tax gap will shrink as this serial vetting goes forward, as all the higher-tax elites who hope for Obama administration appointments hurriedly pay the taxes they forgot to pay -- and scrupulously pay their future taxes. We could be sitting on a tax-gap closing gold mine.

J.D. Foster, is Norman B. Ture Senior Fellow in the Economics of Fiscal Policy for the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

J.D. Foster, Ph.D. Norman B. Ture Senior Fellow in the Economics of Fiscal Policy
Thomas A. Roe Institute for Economic Policy Studies

First appeared in the Washington Times