Wednesday, July 26, 2006

The Tax Gap

Mind the gap

The Government Accountability Office (GAO) just released a report stating how the US government has a tax gap - the difference between that owed and that voluntarily paid - of around $250 billion. They have some good recommendations on how to reduce the gap; better enforcement etc. But are missing the big picture which is of course to have a simpler and cleaner tax system, with lower and consistent rates.

This of course is a one rate consumption tax, with rebates for those earning under say $50,000 per year (around the average family income in the US). Then we can NOT tax the things we want to encourage (income creation and investment) as these create economic growth and rising wages and standards of living, and TAX the things we want to discourage (conspicuous consumption and waste - sorry about the value judgement there :-) ), which do not add to growth and thus better lives for the poor as much as investment and earnings do.

We do not have a problem with tax inequity in the USA: the top 5% of earners pay 35% of the taxes, the lower 50% of earners pay 5% of taxes. This seems pretty fair does it not? So if we get a tax system that is easy to do (the annual cost of preparing taxes is about the same size as the tax gap) we all win. Well at least not lose as much.