Treasury chief warns of burdens in attempts to close tax gap

Treasury Secretary Henry Paulson on Wednesday resisted calls from Senate Finance Chairman Max Baucus, D-Mont., to agree to a goal of reaching 90 percent voluntary compliance with tax laws within 10 years.

Baucus said that would represent a 6 percent increase in compliance rates and add about $150 billion each year to the Treasury. But Paulson said he is hesitant to agree to that target because the steps needed to achieve that result could punish honest taxpayers.

"It's a mirage to say that that 90 percent is out there without some pain," Paulson said under questioning from committee members. "The steps that need to be taken are very, very onerous steps if people are going to get there."

Baucus rained criticism on the administration's efforts to reduce the tax gap, or the difference between federal taxes owed and what is collected. IRS estimates put that figure at $345 billion for 2001, the latest data available. The White House offered 16 legislative changes aimed at trimming the gap in its budget plan, but all those proposals combined would raise less than $30 billion over 10 years.

"[A] few worthy ideas do not rise to the level of a plan," Baucus said. "And a penny on every dollar of the tax gap is simply not enough."

Baucus also noted that nine of the administration's tax gap proposals were included as offsets in the emergency war spending bill that is in conference, and he said he believed the other seven will become part of legislation when details are ironed out.

Paulson said additional progress on the tax gap will be achieved by increased IRS enforcement, in part contingent on Congress approving requested funding increases. But he said the service has no plans for a sharp increase in hiring agents or conducting audits.

Paulson cautioned against "extreme" and "draconian" legislative proposals aimed at identifying and collecting unreported income. He singled out two: a proposal that would require individuals to report payments to service providers on 1099 forms and a plan to require business owners to eliminate cash transactions and use only electronic payment methods, which are easier for the IRS to track.

"In theory, each of these measures could bring in some additional revenue, but the cost of compliance for individuals and businesses -- most of whom already pay what they owe -- would far outweigh the gains," Paulson said.