Sunday, September 30, 2007
Editorial: Tax penalties have lost their bite
Thanks to inflation, fines against tax cheats provide little disincentive these days.
From the RoundTable blog
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Few people enjoy paying taxes, but they do it. Some pay their taxes because they recognize that it is for the national good. Others pay because the law requires it. Then there are the people who don't pay or willfully break the law to avoid paying everything they owe.
The Internal Revenue Service tries to deter such scofflaws with fines, some of which were set decades ago. Thanks to inflation, they don't pack the same punch they used to. These days, they offer little disincentive and are a missed revenue opportunity for a federal government chronically in debt this millennium.
The Government Accountability Office, Congress' investigative agency, recently quantified the loss. If the federal government had upped its penalties along with inflation, it would have collected $38 million to $61 million annually from 2000 to 2005.
Most of that would have come from penalties associated with only a few violations. For example, if someone doesn't even bother filing, that's a $100 fine. And it was $100 back in 1982, the last it was adjusted. Over 25 years, inflation has cut the value of a dollar in half. Had the penalty kept up with inflation, today it would be $214.
Congress can hardly afford to overlook an obvious source of revenue. It wouldn't be much compared to an annual deficit of more than $300 billion, but it would be a start.
The IRS and tax professionals told the GAO that implementing annual inflation increases would be easy.
It is hard to sympathize with the people who would pay higher fines. Tax penalties apply to people who try to avoid paying their fair share. By doing so, honest taxpayers must make up the gap with higher taxes.
Indeed, if Congress works up the gumption to tie tax penalties to inflation, it might also look at jacking them even higher to create a real disincentive. One hundred dollars and even $214 are not much of a threat when tax evasion can score thousands.
