While lawmakers disagree on what our tax law should look like, there shouldn’t be an argument that we need to enforce the tax laws currently on the books. However, Republican Congresses systematically weakened the IRS’s ability to enforce tax laws by defusing the agency, resulting in hundreds of billions in tax losses each year. Two bills introduced in the U.S. House on Thursday would fix this by strengthening tax audits of large corporations and high-income individuals, and giving the IRS more resources.
The tax gap
The IRS estimated that the tax gap – the difference between federal taxes owed and federal taxes paid – averaged $ 381 billion from 2011 to 2013. That has likely grown to around $ 600 billion by now. At least 30 percent of the tax gap is due to tax evasion by the richest 1 percent who receive a disproportionate share of business and investment income that is easy to hide from the IRS. This doesn’t even apply to corporate tax evasion, which may not be criminal but would be blocked by the IRS if the agency had the resources to track it down.
A letter released yesterday and signed by ITEP and other national organizations said: “In recent years, tax enforcement has been severely weakened by budget cuts and insufficient investment in the IRS, owing significant revenue to the US Treasury and the Treasury Damage the fairness and integrity of the tax system. “
On Thursday, Rep. Rho Khanna unveiled the CHEATERS, while Rep. Peter DeFazio reintroduced his previous Congress legislation, the IRS Enhancement and Tax Gap Reduction Act. Both would increase the exams of millionaires and big companies and increase IRS funding, although they differ in the details. Either of these would be of great help and would make our tax laws fairer, without changing what someone owes in taxes, but just ensuring that the wealthy pay what they owe.
How we got here
The problem is one that previous Republican Congresses created, or at least made worse. A July 2020 report by the Congressional Budget Office found that from 2010 to 2018 lawmakers cut the IRS budget by 20 percent in inflation-adjusted dollars, resulting in a 22 percent downsizing, including 30 percent of the IRS’s law enforcement staff. Natasha Sarin and Larry Summers point out that the cuts are even worse. Measured as a percentage of GDP or tax revenue, the IRS has decreased by 35 percent over the past decade. To reverse these funding cuts, they suggest that the IRS budget would need to be increased by more than $ 100 billion over the next decade (which Rep. Khanna’s bill would do).
There is no doubt that this investment would pay for itself many times over. Tax enforcement is a government program that appears to generate more revenue for the federal government.
The July CBO report found that $ 40 billion more would be spent on enforcing IRS taxes to ensure everyone pays what they owe would raise $ 103 billion. However, others believe the returns from improving tax enforcement would be even higher. For one, CBO admits that it does not take into account the indirect effects of increased tax enforcement, which means some taxpayers simply choose to follow the rules after learning that the IRS is cracking down on them.
Sarin and Summers argue that an increase in funding combined with more fundamental changes at the IRS could be much more effective. One of these fundamental changes would be to redesign the agency’s technology. As they put it:
To understand the extent of the IRS underinvestment, consider that the IRS spent $ 2.5 billion on IT investments in 2018. Bank of America, which served only a quarter of Americans, spent more than six times as much.
Another change would require more reporting of third-party information. This is already happening for most wage incomes. When a person earns wages, their employer reports the wages to the IRS so the agency knows if the employee has not reported or underreported that income on a tax return. However, this does not apply to many types of business and capital income that go primarily to the rich. Sarin, Summers, and former IRS Commissioner Charles Rossotti argue that an increase in IRS funding of $ 100 billion could generate well over $ 1 trillion in new revenue in a decade – and it would do so without a change in tax law , but simply better enforce.