March 21, 2011
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515-6348
Dear Representative Black:
Thank you for your questions. Please feel free to contact me if you would like additional information.
1. Evasion at the Individual Tax Payer Level
According to the latest IRS report on the tax gap, dated July 8, 2009, the estimated overall non-compliance rate for tax payments is approximately 16%. The gross tax gap is estimated at $345 billion. After enforcement efforts, the net tax gap is approximately $290 billion. Underreporting of income by individuals is responsible for approximately 50% of the tax gap. Due to its complexity, the tax gap is not well understood. Contrary to popular commentary, the tax gap is not a readily available revenue source. The gap is very difficult to close, because it would be practically impossible to monitor all the ways people potentially earn income.
2. Corporate Tax
There are, as you mention, many factors that determine location decisions, and taxes can, in principle, be a small part of the puzzle. As mentioned by my co-panelist, Proctor and Gamble, for example, often locates its activity close to its customers, which means that it must have operations all around the world. One way to check whether taxes at the margin are important is to watch the revenue impact of lower tax rates. When a nation cuts its rate, it makes itself more attractive, but the rest of its characteristics, presumably, remain the same. The evidence (as reviewed and extended in a recent paper I coauthored with Alex Brill) clearly indicates that there is a wide range over which revenues increase when corporate tax rates decline, suggesting that the tax variable is very important. I would add that for the U.S., at this time, with what is about to be the highest rate in the OECD, cutting the corporate rate would have a bigger impact on the U.S. than virtually any other policy that I can conceive of.
Link for Hassett-Brill reference: http://www.aei.org/paper/26577
Kevin A. Hassett