The Treasury Department wants to raise $700 billion through stricter tax-compliance measures, a potentially key source of revenue for the Biden administration’s spending proposals. It would do so by implementing policies to increase enforcement aimed at closing the federal tax evasion chasm between what taxpayers owe and what they actually pay. They include increased reporting requirements, new tools for auditors, a larger Internal Revenue Service budget to hire additional auditors and new rules on cryptocurrency.
In a July 2020 report, the Congressional Budget Office estimated that modest investments in the IRS would generate somewhere between $60 and $100 billion in additional revenue over a decade. But according to research conducted by Natasha Sarin of the University of Pennsylvania and Larry Summers at Harvard, the revenue potential is much higher than the CBO estimate.
Some of the reasons for the CBO underestimate are: (1) the amount of the funding for the IRS is modest and far short of sufficient even to return the IRS budget to 2011 levels; (2) the CBO contemplates a limited range of interventions, excluding entirely progress on technological advancements; (3) the estimates leave out the effect of increased enforcement on taxpayer decision-making. That is, taxpayers will report their true income out of fear of getting caught. According to their research, a commitment to restoring tax compliance efforts to historical levels could generate over $1 trillion over the next decade.
The Treasury’s Office of Tax Analysis estimated that the changes could bring in an additional $700 billion in tax collections over the next decade, as well as $1.6 trillion in the decade after that. The Treasury estimates that the tax gap is about $600 billion per year, though IRS Commissioner Charles Rettig recently said the number could exceed $1 trillion. So, even partly closing that difference would go a long way toward paying for President Joe Biden’s Build Back Better plan, which includes spending on infrastructure, childcare, and other domestic priorities.
Sarin and Summers estimate that the tax gap over this decade will be about $7.5 trillion, So if the IRS could shrink the tax gap by only 15 percent, they could generate over $1 trillion in additional revenue by conducting more audits that specifically target the highest earners.
The core proposal is to increase tax enforcement. Reducing the tax gap reflects a commitment to ending our two-tiered tax system, one where ordinary Americans pay their full obligations, while high earners who earn income from obscure sources often do not.
Since 2010, the IRS has lost 21,000 employees and its budget has declined around 20 percent after accounting for inflation. The audit staff has declined by a third during that same period, to the point that the 2019 audit rate for individuals was the lowest in over 20 years.
The $80 billion in additional funding for the IRS would be used to improve technology as well as hire and train auditors on complex investigations of corporations, partnerships and wealthy individuals. Banks would also have to report inflows and outflows from taxpayers’ accounts, giving the IRS additional information about business revenue and expenses to better target audits
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A well-functioning tax system requires that all taxpayers pay what they owe. Noncompliance is concentrated at the top because the highest income earners make obscure investments, some of them in overseas tax havens, to evade taxes. According to the National Bureau of Economic Research, the wealthiest Americans fail to report more than 20 percent of their taxable income by using sophisticated forms of tax evasion.
So, what’s not to like about this proposal. Unfortunately, the additional funds needed by the IRS is part of Build Back Better which is now dead because of a lack of votes in the senate.
So why not separate it from Build Back Better? Chances are that it would still not pass because of intense lobbying — that is, donating to election campaigns — by the highest-income earners. So, legislation to enforce existing laws which would raise revenue is now dead. That to me is the ugly face of corruption.
Murad Antia, now retired, taught finance at the Muma College of Business at the University of South Florida in Tampa.