Democrats and the ‘tax gap’

The federal government's penchant for redistributing income was laid bare by former White House press secretary Ari Fleischer in Monday's edition of The Wall Street Journal. His commentary, "The Taxpaying Minority," points out that the wealthiest 40 percent of the nation's households pay 99 percent of all income taxes. And the poorest 40 percent of households pay no income tax whatsoever.

Yet congressional Democrats are heightening the class warfare that has led to this disparity. They want to soak the country's upper-middle and upper classes -- who already cover all the bills for federal programs and services -- with the largest tax increase in American history by allowing relief signed into law by President Bush to expire in 2010.

But that's three years out. Majority Democrats need more money now to increase spending on social programs and handouts favored by those who don't have to pay for them. Democrats lack the political will to stage a prime-time news conference and demand even more money from the most productive Americans, so they're asking the IRS to conduct the shakedown instead.

The federal government estimates that Americans underpay their federal returns by around $300 billion per year. Democrats want the IRS to close this so-called "tax gap" by collecting far more than the 5 percent typically recouped through audits and investigations.

But meeting this goal would require thousands more IRS agents, stricter filing guidelines and harsher punishments for those who make even honest mistakes on their tax returns.

"There is a big part of the tax gap that we simply won't be able to reach without adding Draconian and painful requirements on all taxpayers," Treasury Secretary Henry Paulson told the Senate Finance Committee on Wednesday.

"The cost of compliance for individuals and businesses -- most of whom already pay what they owe -- would far outweigh the gains."

"The American people have a right to expect that their government will have a ... credible plan to reduce this tax gap," Committee Chairman Max Baucus, D-Mont., countered. "And it is the Treasury's job to fix it."

In fact, Congress could fix it by simplifying the federal tax code. The tax gap exists, in no small part, because current tax law is far too complicated for most Americans to navigate with accuracy. A plethora of loopholes, credits, deductions and worksheets create equal opportunities for error and fraud.

But rather than create a tax code that encourages economic growth, spreads burdens more equitably and ensures that Americans pay exactly what they owe, Democrats want to turn IRS agents loose on the people who already pay more than their fair share. And if the tax man can round up baby sitters, nannies and anyone else who might have earned $20 under the table in the process, all the better.

Democrats are carefully measuring their every move in advance of the 2008 elections. Unless they want a massive popular backlash to a policy initiative that can be pinned exclusively on their rear ends, Democrats would be wise to keep the IRS on a tight leash -- and forget about tackling the tax gap without accompanying reform.