Bloomberg Tax
Feb. 1, 2023, 9:45 AM

Defend IRS Funding as a High-Return Investment in Democracy

Don Griswold
Don Griswold
Digital Economist

Policy analysts have warned that last month’s House vote to cut nearly all of the IRS’ transformative new funding wasn’t mere symbolism. We can be confident that the Senate and president won’t go along with gutting the deeply needed $80 billion, decade-long investment that the last Congress belatedly enacted as part of the Inflation Reduction Act of 2022. But the annual ritual of budget battles and government shut-down threats will give the House multiple new opportunities and better leverage to achieve its gutting goal.

The public must remember why the IRS funding package is essential to our nation’s fiscal resilience and, indeed, to the health of our democracy. In short, it closes the tax gap by targeting wealthy tax dodgers while closing the tax service gap by bringing the IRS into the digital age.

Tax Gap and Tax Service Gap

Let’s start with the $7 trillion problem. That’s the size of the tax gap—the shortfall between what taxpayers owe and what the IRS collects—over the next decade. The Center on Budget and Policy Priorities reports that this shortfall was $574 billion for 2019 alone, and that the annual tax gap will soon reach $1 trillion a year if we continue on the present course.

Honest mistakes by middle-class taxpayers make up a tiny fraction of the tax gap; this group has more than a 99% compliance rate. Tax avoidance and evasion (corporate and individual) account for almost all of the gap. And an astounding 20%—$160 billion in 2019—was tax avoidance or evasion by “one percenters,” the wealthiest 1% of Americans.

One percenters possess the resources to hire expensive professionals in the tax avoidance industry who can easily outmaneuver the IRS because the agency lacks the resources to audit these complex avoidance strategies. And these Big Four, Big Law, and boutique firms run thriving multibillion-dollar businesses in part because all too many of these one-percenters possess something else—a distinctly un-American eagerness to engage in tax avoidance and evasion.

And then there’s the tax service gap. Honest taxpayers can’t get the help they need from the IRS to navigate the tax system. Starved of staff and technology—with software dating to the Kennedy administration—the IRS is capable of answering only 15% of taxpayer phone calls.

View of the IRS building in Washington, DC, on Jan. 24, 2023.
Photographer: Photo by Stefani Reynolds/AFP via Getty Images

IRS Funding and Its Implications

Congress has been “financially starving the IRS for over 25 years,” former IRS Commissioner Charles Rossotti says. The agency operates today with almost 20% less than its 2010 funding—fewer auditors than at any time since World War II. It has lost nearly 40% of its sophisticated “Wealth Squad” audit staff who possess specialized expertise to audit complex tax returns of high-income individuals and large corporations—whose avoidance and evasion are responsible for most of that nearly $1 trillion annual tax gap.

Treasury Secretary Janet Yellen notes that the result is reduced tax fairness—”working families are shouldering a disproportionate burden of investing in our roads, schools, military” and more. The Center on Budget and Policy Priorities explains that the underfunded agency’s failure to detect and stop tax avoidance and evasion “is unfair to honest taxpayers and risks undermining the integrity of the tax code.”

For these reasons, the last Congress provided that $80 billion over 10 years to modernize and rebuild the IRS’ capacity to live up to its essential mission. Yellen explained that the money will correct the current “two-tiered tax system, where high earners play by different rules than working and middle-class families [and] raise hundreds of billions of dollars in revenue.”

Return on Investment

The projected return on investment pursuant to the IRS funding package would make any investor salivate. The US Treasury Office of Tax Analysis estimates that the $80 billion will raise an additional $700 billion in tax collections—a large part of the tax gap—and raise another $1.6 trillion in the following decade. Rossotti, a technology expert, predicts that every incremental dollar of enforcement funding will return $15 to $20 over the next decade.

That outstanding ROI would have satisfied even the grandfather of conservative trickle-down economics, Adam Smith. His fourth maxim of taxation—“economy in collection”—requires that tax administration not “take out … of the pockets of the people a great deal more than it brings into the public treasury.”

Taxation, Tax Collection, and Democracy

Despite considerable national disagreement regarding the level of services that ought to be provided by the US government, we can all agree that we must fund our government’s operations by imposing and collecting taxes. As Oliver Wendell Holmes put it, “Taxes are what we pay for civilized society.”

Consequently, as Yellen puts it, “the IRS is a foundation of our government and society.” Delving into this truism, the Tax Justice Network has explained that fair and efficient taxation joins citizens together in a “social fiscal contract” that “can build healthy links of accountability and political representation between governments and their citizens.”

Yellen, pointing out that the IRS “is one of the very few parts of the federal government that touches nearly every American household,” explains that tax enforcement “is not only a means to raise revenue. It is also a matter of fundamental fairness.” She goes on to stress a critical rationale behind the IRS funding bill: “It is important for honest taxpayers to know that, when they file their taxes accurately with the IRS, other people are doing the same.”

The continuing vitality of our nation’s social fiscal contract depends in no small measure on the ability of our federal tax collection agency to provide service and to enforce compliance—with a consistently high level of professionalism and effectiveness that generates widespread agreement that our tax system is fundamentally fair. This requires robust funding for the IRS.

This is a regular column from public interest tax policy analyst Don Griswold, who’s also a senior fellow at the Digital Economist. Look for Griswold’s column on Bloomberg Tax, and follow him on LinkedIn.

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