The Net Tax Gap: You Won't Believe How Much Tax Cheats Steal

Created: 27 August, 2015
Updated: 16 October, 2022
8 min read

To understand American politics at the federal level, it is helpful to consider most issues from four points of view. Despite some simplification, a four-point analysis usually leads to a more nuanced and accurate understanding of issues compared to the usually misleading, self-serving black and white picture the two-party system (TPS) routinely conveys to the public.

The four points of view are liberal, conservative, TPS, and objective.

The first three points of view are largely subjective, meaning that issues are framed by liberal, conservative, or TPS political ideology, values, or morals. To a large extent, those subjective ideological differences dictate three different sets of facts or reality and different common sense or logic that leads to different policy choices.

As described before, the objective point of view relies on the political ideology or values of (i) unspun fact and (ii) ideologically unbiased logic that is (iii) framed by the concept of service to an objectively defined public interest, which is based in part on balancing competing interest demands or needs (e.g., as previously described).

The net tax gap is an issue that illustrates how this approach to politics sheds light on how subjective and objective politics can see the same issue. It is arguably one of the most important political issues that most Americans do not understand or know anything about.

The Net Tax Gap: Congress’ Gift to Tax Cheats - They Steal How Much?!?!

The net tax gap is not a complicated concept. It is simple. The net tax gap is the total amount of tax that individuals and businesses owe but do not pay to the Internal Revenue Service (IRS). Failure to pay taxes is tax fraud or tax evasion and, for willful non-payment, it can be a felony.

IRS data shows that the 2001 net tax gap was $290 billion and $385 billion for 2006, an increase of $19 billion/year. At that rate of increase, the 2015 net tax gap would be $556 billion. For the sake of argument, the 2015 net tax gap is assumed to be somewhere between $450 billion and $650 billion.

In response to a formal Dissident Politics request to the IRS to calculate net tax gap data for a more recent year (e.g., 2010 or 2011), the IRS indicated no interest in doing that. The likely reason for that reluctance is explained below in the TPS point of view.

One estimate is that for each additional $1 the IRS spends to chase tax cheats and recover some or all of what is owed, the U.S. Treasury would recover at least $6. Despite this massive annual theft from the American people, Congress has decreased the IRS budget by about 10% since 2010 and IRS enforcement performance and staffing levels have declined.

One observer calls the situation “Congress’ gift to tax cheats."

The office of the National Taxpayer Advocate has been desperately pointing this out to Congress for years and for years, Congress has utterly ignored the warnings. The budget situation at the IRS is so dire that when taxpayers call for help with their taxes, the phones often aren’t answered.

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The situation is therefore obviously and undeniably bipartisan. Congresses under both parties are fully complicit.

The Liberal Point of View

Despite some personal discomfort in contemplating an IRS with a bigger budget and tax law enforcement staff, it is likely that many liberals, say about 70%, would favor increasing the IRS budget to reduce the annual level of theft. This accords with liberal ideology or values that tend to accept and/or favor federal government activity, including federal agency budgets and staffing.

Given the concurrence between liberal ideology and what IRS tax gap data shows, most liberals probably would not question the accuracy of the tax gap data.

The Conservative Point of View

Based on the author's direct personal experience with this issue, it is likely that many conservatives, say about 70%, would oppose any increase in the IRS budget to reduce the annual level of theft. This accords with (i) conservative (and libertarian) anti-government ideology and (ii) the rational belief that whatever is recovered would be wasted by Congress based on its track record of decades of profligacy.

This also accords with the conservative perception of reality that the IRS illegally targeted conservative political groups to prevent them from getting tax-exempt status and the IRS cannot be trusted and therefore its data is probably suspect and a smoke screen to grab even more unconstitutional power than it already has.

Many or most hardcore conservatives and essentially all libertarians already believe (or know) that (i) most of what the federal government does is unconstitutional and (ii) taxes are far too high.

With that mental framework, increasing the IRS budget is out of the question, regardless of any alleged economic or other upsides. In this case, a conservative’s professed value of respect for the rule of law is trumped by the more important conservative value of disagreement with and distrust of the federal government and most of its activities.

The Objective Point of View

From an objective public service-oriented point of view, the situation clearly calls for a fix. There is no reason to allow theft that could easily be in the neighborhood of half a trillion dollars per year. What the fix could be is wide open.

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Since objectivity is not constrained by any fundamental pro- or anti-government ideology or value, a solution could include (i) increasing IRS personnel for law enforcement, (ii) outsourcing some or all collection activity to the private sector, which may be more cost-effective than having federal employees do the task, (iii) a tax code overhaul to make fraud and evasion more difficult (e.g., replacing income taxes with a VAT, national sales tax or something similar that makes cheating harder), and/or (iv) reducing tax rates and/or increasing fraud and evasion penalties to broaden the tax base and reduce incentives to cheat, without significantly reducing revenues.

Objective politics is not concerned with whether the best policy choice just happens to be liberal, conservative, or in accord with any other subjective moral or ideological framework or the “facts” and “common sense” that flows naturally but unconsciously therefrom.

Objectivism is concerned with what best serves the public interest based on unspun facts and unbiased logic.

Direct competition tends to sharpen the mind and quicken the pace, a basic tenet of capitalism. Objectively speaking, direct public vs. private sector competition serves the public interest by making pro- and anti-government ideologies and their partisans put up or shut up.

The Winner By Far: The TPS Point of View

The tax gap situation is what it is because it is fully in accord with the TPS point of view, its morals and its perceived self-interested needs. From the TPS point of view, what liberals, conservatives, and objectivists think is mostly irrelevant except to the extent that their beliefs and policy choices overlap with TPS’s needs.

For this political issue, conservatives are significantly aligned with TPS needs and thus presumably prefer accepting the theft over doing something about it, which accords with current TPS policy.

Data from Princeton University shows that the TPS, which includes the economic elites that fund it, is far more important in determining policy than public opinion:

“In the United States, our findings indicate, the majority does not rule—at least not in the causal sense of actually determining policy outcomes. When a majority of citizens disagrees with economic elites and/or with organized interests, they generally lose. Moreover … even when fairly large majorities of Americans favor policy change, they generally do not get it.”

From an objective point of view, the tax gap situation is completely irrational unless one considers it to be part of how the TPS sees its own needs. It is reasonable to believe that there is a powerful motivator behind the TPS wanting an IRS that is crippled in its ability to wring revenue out of tax cheats. If those tax cheats are among the economic elites that largely control federal policy, it is painfully clear that those people and business entities do not want the IRS looking at their taxes.

The best way to ensure such safety from scrutiny is to have Congress cripple the IRS. If that isn’t the reason for massive annual tax gaps, what is?

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Since 2001, Americans have been cheated out of about $4.56 trillion. What explanation can there be for the refusal of the TPS to solve a known but easily-solvable problem? Given the size of the problem, why won’t the IRS formally calculate tax gap data for later years?

It is not unusual for the TPS to have little or nothing to say about certain political issues. America’s tax gap situation probably is the best example there is of how powerful silence can be in defense of an inept, corrupt status quo. Threats from the TPS would explain IRS reluctance to calculate more recent tax gap data.

Given how corrupt and incompetent the tax gap situation makes the TPS look from the liberal and objective points of view, it is no surprise that the tax gap isn’t on anyone’s radar as a major issue in politics. The best way to deal with failure is to ignore it and say nothing.

Silence and suppression of unbiased data generation (e.g., gun violence research) has been a successful TPS strategy for decades. This issue isn’t the only one where the TPS’s silent treatment and attacks on unspun facts have worked brilliantly in defense of America’s failed, corrupt two-party status quo.

Photo Source: AP