The Buzz

Revealed: IRS Admits Tax Code Is Too Complex to Enforce

In an ideal world the federal government would collect all of the taxes that it was owed—and then spend only what it intended to. Unfortunately, things aren’t that simple.

Instead, every year we have a “tax gap,” which is the difference between what the government believes it is owed, and what it actually takes in, and “improper payments,” which refers to the government sending money to those it doesn’t mean to (paying benefits to deceased persons, for example).

The tax gap and improper payments serve as reminders that the federal government is not very good at administering complex programs.

Understanding the Tax Gap

There are two types of taxpayers that contribute to the tax gap. There are willful tax evaders, who knowingly underreport their income or overstate their deductions, and there are taxpayers that make errors on their tax forms accidently. As the tax code has become increasingly complex, both voluntary compliance and enforcement have become ever more difficult. Even the IRSadmits that “the complexity of the tax code makes the tax law too difficult for taxpayers to understand and for the IRS to administer.”

One way to simplify the tax gap would be to move toward a flat consumption tax. As explained by Curtis Dubay, a research fellow in tax and economic policy at The Heritage Foundation, by incentivizing saving and investment, a flat consumption tax would increase economic growth by up to 15 percent in 10 years. Such a tax could be realized without affecting the overall distribution of the tax system, a common criticism of flat consumption taxes.

A flat consumption tax would also reduce the tax gap and ensure that people pay the correct amount of taxes. The simplicity of a flat tax would help taxpayers understand and voluntarily comply with the tax code and limit opportunities for tax evasion. A flat consumption tax would stimulate the economy and reduce the tax gap, all without affecting the overall distribution of the tax code.

2015 Deficit

Although the tax gap ($385 billion) and improper payments ($137 billion) add up to more than the deficit for the 2015 fiscal year ($468 billion), they can never be completely eliminated. There is therefore no easy fix to balance the budget in the short-term. The size of the U.S. economy and government make it impossible to eliminate all instances of waste, fraud, and abuse, and to collect every penny that is owed to the government.

Payment error is also a natural outcome of complex program design. A program that targets benefits toward those with few other means will exhibit more payment error than a universal benefit program, for example. In those instances, payment error is a direct outcome of program complexity. Government can save money by providing benefits to a narrower group of the population, despite some payment error, versus paying benefits to everyone with close to zero payment error.

Unfortunately, many politicians focus on these issues instead of the real drivers of our national deficit: growing spending on health care and retirement programs. However, by simplifying the tax code and making commonsense reforms to federal spending programs like Medicare and Medicaid, both the tax gap and the number of improper payments could be reduced.

Reducing Improper Payments