In this news:
Close the annual IRS tax gap of $696 billion, help Department of Defense (DoD) address its significant internal control weaknesses and avoid the 8% proposed defense cut and get the US to recognize its $40 trillion of off-balance sheet unfunded entitlements
WASHINGTON, DC - FEBRUARY 11: Tesla and SpaceX CEO Elon Musk, accompanied by U.S. President Donald ... [+] Trump (R), and his son X Musk, speaks during an executive order signing in the Oval Office at the White House on February 11, 2025 in Washington, DC. Trump is to sign an executive order implementing the Department of Government Efficiency's (DOGE) "workforce optimization initiative," which, according to Trump, will encourage agencies to limit hiring and reduce the size of the federal government. (Photo by Andrew Harnik/Getty Images)
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Let us begin by making the obvious point: there is waste or inefficiency in government, and we need to rationally address this problem. The IMF states that US government spending is around 36% of US GDP. But where should one begin? I suggest three areas that have not been as discussed as much.
1.0 Close the IRS tax gap
The Internal Revenue Service (IRS) publishes an estimate of the so-called tax gap every year. The tax gap is the amount of true tax liability that is not paid voluntarily and in a timely manner by taxpayers. For the latest available year, TY (tax year) 2022, the projected annual gross tax gap by the IRS is $696 billion. The TY 2022 gross tax gap comprises of three components:
Nonfiling (tax not paid on time by those who do not file on time) $63 billion,
Underreporting (tax understated on timely filed returns) $539 billion, and
Underpayment (tax that was reported on time but not paid on time) $94 billion.
Cut a different way, the voluntary compliance rate is the “tax paid voluntarily and timely” divided by an estimate of “total true tax.” The projected voluntary compliance rate is 85 percent. The IRS estimates that the bulk of the gap is attributable to individual income tax ($514 billion). Corporate taxes, contrary to popular belief, is relatively small ($50 billion). The next largest line item is employment tax of $127 billion.
1.1 How can the tax gap be closed?
It is somewhat shocking that the last publication on reducing the tax gap that I could find on the IRS’ website was from July 2009! Back in 2006, US Department of Treasury looked at how we could reduce the tax gap. Four ideas were proposed: targeted legislative and administrative changes, taxpayer service, and enforcement efforts and of course congress can work on minimize tax burdens.
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