Focus on the Tax ‘Avoidance ’ Gap

President Obama’s tax reform task force has been asked to propose ways to close the $300 billion per-year tax gap by simplifying the tax code, reducing evasion, closing loopholes, and reducing corporate tax breaks. That $300 billion figure is an IRS estimate of the ‘‘net tax gap’ ’ for tax year 2001. The IRS defines the net tax gap as the difference between the amount taxpayers owe for a given tax year and the amount they pay on time, less what the IRS expects to recover in the future from voluntary late payments and enforcement activities. The apparent focus on the IRS-defined tax gap is the wrong agenda for a tax reform panel. The United States faces two tax gaps: the IRS measure of tax evasion and a second gap that may be called the legal avoidance gap. This second gap — the difference between taxes under a