To Sharply Reduce Deficits, Enforce Tax Laws

Blog Post
Saturday, April 20, 2019

Federal deficits are rising so rapidly that many politicians appear to be throwing up their hands and simply ignoring the numbers.

It is true that the necessary fiscal repairs would generally require hard choices and public sacrifices. There is at least one simple strategy, however, that offers large amounts of low-hanging fruit in terms of deficit reduction: Just enforce the tax laws.

The tax code needs significant reform, and that is unlikely to happen until after next year’s elections. But simply enforcing the tax laws that are on the books -- and helping taxpayers understand what they owe -- could substantially reduce the need for more federal borrowing.

A recent analysis by William G. Gale and Aaron Krupkin of the Urban-Brookings Tax Policy Center highlights how much lost government revenue could now be at stake.

“Tax evasion -- the act of not paying taxes that are owed -- is illegal and is an underappreciated problem in the United States,” they write. “About one out of every six dollars owed in federal taxes is not paid. The amount of unpaid taxes is plausibly about three-quarters the size of the entire annual federal budget deficit.”

The Internal Revenue Service periodically estimates the “tax gap,” which is the amount of taxes that are not paid in a timely or voluntary manner. That number can only be pinned down several years after the tax year in question, allowing time for adjustments, late payments and enforcement efforts.

The most recent tax gap report by the IRS, released in 2016, looked at tax years 2008-2010. It reported the net tax gap -- which accounts for late payments -- for that period as averaging $406 billion per year.

“If the tax gap stayed constant relative to GDP since then,” Gale and Krupkin write, “it would have reached $560 billion by 2018. If it stayed constant relative to tax revenues, it would have reached about $600 billion.”

The federal deficit for last year, they note, was $779 billion, “so the tax gap could plausibly have been 70-80 percent as large as the entire budget deficit in 2018.”

Gale and Krupkin also emphasize that income misreporting is “significantly higher” for farms and sole proprietorships, and is likely higher for high-income households than those with lower incomes.

Their conclusions: “Along with the obvious problem of the underfunding of the government, tax evasion raises fundamental questions about the fairness of the tax system.”

It has become increasingly clear, however, that lawmakers have failed to ensure that the IRS has sufficient resources to explain and enforce the complex federal tax code. IRS officials and some lawmakers have repeatedly warned that this was hurting taxpayers, draining large amounts of federal revenue and jeopardizing public confidence in the system.

In February, for example, National Taxpayer Advocate Nina E. Olson sent an annual report to Congress that detailed some of the difficulties facing the IRS -- such as “antiquated” technology systems -- that required additional funding.

“The IRS systems that constitute the official record of taxpayers accounts . . . are the oldest in the federal government and for the last 25 years the IRS has tried -- and been unable -- to replace them,” she wrote.

Taxpayer information is stored in more than 60 separate case management systems, which Olson says helps to explain why the IRS “can’t be sure it is focusing on the right taxpayers or the right issues in its outreach, audit and collection activities.”

Gale and Krupkin say that IRS funding fell by more than 12 percent in inflation-adjusted terms from Fiscal 2008 through Fiscal 2017.

According to a report last month from the Government Accountability Office (GAO), “IRS staffing has declined each year since 2011, and declines have been uneven across different mission areas. GAO found the reductions have been most significant among those who performed enforcement activities, where staffing declined by around 27 percent (fiscal years 2011 through 2017).”

The number of individual returns audited in that period, GAO says, fell by nearly 40 percent.

Using 2017 data, Gale and Krupkin say, the IRS “estimates that each dollar of investment in enforcement programs yields $12 in additional revenues, while each dollar in the overall IRS budget increases revenues by about $5. In addition, targeting added enforcement activities on high-income households would yield more revenue than using the resources to audit lower-income households.”

“Cutting IRS spending, as policymakers have done in recent years, is penny-wise and pound-foolish,” they write.

It is hard to argue with that. If elected officials want to at least slow federal deficit growth, investing more in better tax code enforcement seems like an obvious step.

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