The Treasury Department wants to raise $700 billion through tougher tax compliance measures, a potentially key revenue stream for the Biden administration’s spending proposals. It would do this by implementing policies to strengthen enforcement aimed at closing the federal tax evasion gap 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 cryptocurrency rules.
In a July 2020 report, the Congressional Budget Office estimated that modest investments in the IRS would generate between $60 billion and $100 billion in additional revenue over a decade. But according to research by Natasha Sarin of the University of Pennsylvania and Larry Summers of Harvard, the earning potential is well above the CBO’s estimate.
Some of the reasons for the CBO’s understatement include: (1) the amount of IRS funding is modest and far from sufficient even to bring the IRS budget back to 2011 levels; (2) the CBO envisions a limited range of interventions, excluding advances in technological advances entirely; (3) estimates do not take into account the effect of increased enforcement on taxpayer decision-making. That is, taxpayers will report their true income for fear of getting caught. According to their research, a commitment to restore tax compliance efforts to historic levels could generate more than $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 revenue over the next decade, as well as $1.6 trillion over the following decade. The Treasury estimates the tax gap to be around $600 billion a year, although IRS Commissioner Charles Rettig recently said the figure could exceed $1 trillion. So even partially 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 national priorities.
Sarin and Summers estimate that the tax gap over this decade will be around $7.5 trillion. So if the IRS could reduce the tax gap by just 15%, it could generate more than $1 trillion in additional revenue by doing more audits specifically targeting top earners. .
The basic proposal is to increase tax enforcement. The narrowing of the tax gap reflects a commitment to end our two-tier tax system, a system in which ordinary Americans pay their full obligations, as opposed to high earners who earn income from obscure sources.
Since 2010, the IRS has lost 21,000 employees and its budget has shrunk by about 20% after adjusting for inflation. Audit staff has shrunk by a third over the same period, to the point that the audit rate of individuals in 2019 was the lowest in more than 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 high net worth individuals. Banks should also report inflows and outflows from taxpayer accounts, giving the IRS additional information about business income and expenses to better target audits.
Spend your days with Hayes
Subscribe to our free newsletter Stephinitely
Columnist Stephanie Hayes will share her thoughts, feelings and fun stuff with you every Monday.
You are all registered!
Want more of our free weekly newsletters in your inbox? Let’s start.
Explore all your options
A well-functioning tax system requires all taxpayers to pay what they owe. Non-compliance is concentrated at the top because top 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 declare no more than 20% of their taxable income using sophisticated forms of tax evasion.
So what’s not to like about this proposal. Unfortunately, the additional funds needed by the IRS are part of Build Back Better which is now dead due to a lack of Senate votes.
So why not separate it from Build Back Better? Chances are it still won’t pass due to intense lobbying – that is, campaign donations – from the highest earners. So, legislation to enforce existing laws that would increase revenue is now dead. To me, that’s 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.