Transcripts

The Fuzzy Math Behind The Tax Gap

PAUL KANGAS: President Bush is taking his plan for the economy on the road. At the Caterpillar plant in Peoria, Illinois, today, Mr. Bush said the nation needs to keep its economy growing and we can do that with low taxes and free trade. He wants Congress to make his tax cuts permanent, a move he says won't interfere with balancing the budget. Tomorrow, the president heads to New York City for a speech there on the economy.

And speaking of the economy, with the cost of the war in Iraq and hopes of restoring fiscal discipline, Democrats in Congress are trying to find cash to pay for their priorities. That's where the tax gap comes in. As Darren Gersh reports, it's the difference between what Americans owe the IRS and what they actually pay.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: In Washington, closing the tax gap has become a favorite way to bring in money without seeming to raise taxes. That's why Senate Finance Committee Chairman Max Baucus came to talk to the IRS today.

SEN. MAX BAUCUS, FINANCE COMMITTEE CHAIRMAN: It's just not fair to American taxpayers that about $345 billion annually of revenue which is legally owed is not collected.

GERSH: Baucus and other tax writers on Capitol Hill are now looking very closely at investors to help close some of that tax gap. The Government Accountability Office estimates in 2001, eight million taxpayers misreported their capital gains taxes. The main reason: brokers tell the IRS how much an investor got from selling a stock, but don't report what the investor paid for that stock. Capital gains taxes are figured by subtracting gross sales from the cost paid -- or basis -- to get at the capital gains used to calculate the actual tax owed. National taxpayer advocate Nina Olson says, if brokers reported stock cost basis to the IRS, the government could collect up to $10 billion a year. The information might also help some taxpayers who aren't sure what they paid for a stock or mutual fund.

NINA OLSON, NATIONAL TAXPAYER ADVOCATE: What they do is they guess, and they are just as likely to underestimate what their basis is and overpay tax.

GERSH: Many brokerage firms already track cost basis for customers. Marc Lackritz is co-CEO of the Securities Industry and Financial Markets Association. He cautions basis reporting can get tricky when you throw in things like foreign stocks and real estate investment trusts.

MARC LACKRITZ, CO-CEO, SIFMA: There are a number of different instruments where the prices are not that easily discerned and where it's complicated, so what we need to do is we need to phase this in in a measured way, by taking the simple things first, like taking stocks, for example, or mutual funds first.

GERSH: If Congress does decide to require stock basis reporting, it's likely to do so for new investments. No one expects a broker to try to figure out what somebody paid for AT&T 30 years ago. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.