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The Tax System

by taxnick on October 12, 2008

The primary purpose of the tax system is to raise revenue for the U.S. Government. According to the U.S. Budget, tax receipts represent 58.8% of federal revenue; the federal deficit is projected to be $364 billion and $521 billion for the years 2005 and 2004, respectively. Therefore, the $345 billion tax gap has a considerable effect on the federal budget (see “Analytical Perspectives: Budget of the United States Government, Fiscal Year 2005,” from www.whitehouse.gov).

While measuring the magnitude of the tax gap is important, from an economic standpoint identifying the source of the tax gap is a necessary precursor to developing a structured plan to reduce the gap. To guide enforcement efforts, policymakers must identify who is cheating as well as how they are cheating. Identification of tax-gap sources also matters from a psychological standpoint, because tax evasion has been linked to the perceived fairness of taxpayer burden. That is, taxpayers are more likely to cheat if they perceive others in similar situations (occupation, education, income) are cheating:

The United States has long been proud of the “taxpayer morale” of its citizens—the willingness to pay voluntarily the income taxes necessary to finance government activities. Taxpayer morale ultimately depends, however, on the belief that taxes are fair. If the basis for this belief comes under suspicion, voluntary compliance with the tax laws is jeopardized. … Taxpayers resent paying substantially more than their neighbors who have equal or higher incomes. (“Tax Reform for Fairness, Simplicity, and Economic Growth,” U.S. Department of the Treasury, 1984; www.treas.gov/offices/tax-policy/library/tax-reform).
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