The Tax Increase Backlash: Rates of Less Return

Article excerpt

The Internal Revenue Service is an agency under siege. On the one hand, it is under continuous pressure from Congress to collect every last dollar owed to Uncle Sam, in order to reduce the deficit and lower the burden on law-abiding taxpayers. But on the other hand, it is continually criticized by Congress for using heavy-handed tactics, bullying and harassing taxpayers, and overstepping its bounds.

Clearly, the IRS is caught between the proverbial rock and a hard place. If it is to increase the compliance rate for tax collections, it must use ever more draconian methods. But when such methods are employed, it faces a backlash from irate taxpayers and their elected representatives.

According to the latest estimates, in 1992 the IRS collected between 83.1 percent and 83.6 percent of the individual income tax revenue it believes it was entitled to, and between 81.1 percent and 88.1 percent of the corporate revenue. This left a tax gap of between $110.1 billion and $127 billion uncollected. Three-quarters of the individual tax gap came from unreported income, mainly from self-employment.

While much of the debate over tax compliance involves questions about audit rates, modernization of IRS computers and other technical issues, tax rates also play a critical role. A number of academic studies have shown that the higher tax rates are, the greater tax evasion is. This stands to reason, since the higher tax rates are the greater the profit in tax evasion. …