The GAO estimates uncollected taxes, called the tax gap, totals $385 billion annually and improper payments from all federal programs totals $125 billion annually. The most material problem causing the tax gap and improper payments is the underreporting of income and inaccurate household information reported by taxpayers and welfare recipients (See Welfare Fraud Page). Taxes are paid based on the level of income reported by the taxpayer and welfare is distributed in most welfare programs based on the level of income combined with other household information, such as dependent children, reported by welfare recipients. It appears many Americans are adept at playing the system and when the system is as complex as the tax code and welfare rules, they have plenty of opportunity. Of course not all the irregularities are purposeful, many are simply errors interpreting complex rules and forms.
Here is how the GAO explains the problem, “… the extent to which individual taxpayers accurately report their income is correlated to the extent to which the income is reported to them and the Internal Revenue Service (IRS) by third parties. Where there is little or no information reporting, such as with business income, taxpayers tend to significantly misreport their income.”
It is hard for the federal government to police how much people make, particularly when the tax code and welfare definitions are varied and complex. It is also hard to police such things as whose living how much time in what household, who is a primary care giver to a child and etc. These definitions drive taxes due and welfare payments and yet the federal government has too few tools for verification. The problem is exacerbated when there are multiple definitions and rules regarding income. It is also the case that multiple agencies run independent databases and don’t coordinate their findings or data. The complexity and bureaucracy add up to lots of missing money.
There is a cost to our complex, bloated tax code and safety net programs. GAO says it is over $500 million a year. They also say “The federal government continues to face an unsustainable long-term fiscal path. Changing this path will require difficult fiscal policy decisions to alter both long-term federal spending and revenue.”
It is amazing to think we could go a long way in solving our “unsustainable path” merely by simplifying income and household definitions, making them consistent for all government uses and policing them in a single agency. Perhaps that is a “difficult path”, but it ought not to be.