HOW WOULD you prefer to go about raising taxes? The question is not an idle one. The closing of the enormous federal budget gap can't be achieved by cutting spending alone. An acceptable program to reduce the deficit will have to include hefty tax increases--or at least smaller reductions than the administration has promised. One good way to reduce the generalized pain of raising taxes is to concentrate increases among those people who currently aren't paying their fair share of the tax burden.
The most obvious candidates for a tax hike are that large--and growing--number of people who cheat the government outright. Middle-of-the-road estimates place"underground income" at more than $350 billion a year with resulting tax losses of about $100 billion. Some of this income comes from illegal sources--primarily drug dealing, bribery, stolen goods and prostitution. But most of it--perhaps 75 percent--is gotten legally by people who simply choose to conceal it from the IRS. Some of these people are low-earning waitresses and cabdrivers who "forget" to report tips. The biggest offenders, however, are business proprietors and professionals and investors who "skim" cash from transactions, barter goods and services with clients, or fail to report dividends, interest and capital gains.
The tax evaders are the primary targets of a set of proposals being developed by Senate Finance Committee Chairman Robert Dole with the general endorsement of the Treasury Department. Other committee members, however, including Sens. Steven D. Symms and Max Baucus have questioned whether substantial improvements in compliance can be realized as long as the tax code remains riddled with loopholes that-- however different their legal status--appear to the average citizen as little more than an excuse for rich people to subsidize their vacations, hobbies and entertainment at the expense of other taxpayers.
The specialists and lobbyists who guard the tax code will hasten to explain how important to economic growth is each and every one of these loopholes. They may neglect to mentio, however, that --whatever the presumed rationale at the time of enactment--many preferences have outlived their economic usefulness. Other preferences exist only because they were needed to offset the biases in investment decisions that were created by earlier preferences. If all of these exclusions and deductions were eliminated, income tax rates could be cut almost in half--a much better and more stable incentive for work and saving than the most finely crafted set of tax incentives.
The gains from simplifying taxes and stepping up compliance go well beyond the immediate increase in revenues. The United States, unlike some European countries, has been fortunate in that most people pay their taxes honestly and promptly. This is an enormous public benefit, because it means that the tax burden can be distributed equitably with a minimum of harassment. Tax evasion, however, is on the rise. Higher taxes or a growing distrust of government may be part of the reason, but experience in other countries suggests that tax evasion feeds on itself. The more people indulge in it, the more others will follow--and that's a trend with ominous consequences for more than next year's deficit.