Enforce the Tax Laws We Already Have
What if the federal government could raise roughly $1.1 trillion over ten years without hiking tax rates? That ain’t Medicare for All money, but it’s in the ballpark of paying for the recent tax cuts.
According to a new report from the tax-law professor Natasha Sarin and the center-left economist Lawrence H. Summers, all it might take is some stepped-up, well-targeted law-enforcement activity from the IRS. The government would get a substantial revenue boost, tax cheats would foot the entire bill, and the system would become fairer — because there would be less of a de facto tax cut for dishonest people with hard-to-document income sources.
Hate the IRS all you want. But tax laws, like all laws, need to be enforced fairly, and that’s not a bad deal financially.
It should surprise no one that tax evasion is rampant. The IRS itself recently put the annual loss at $380 billion per year for the period of 2011 to 2013; accounting for inflation and growth, that will be about $630 billion next year. To collect the estimated $1.1 trillion over ten years, the government would have to close just 15 percent of the total gap.
Sarin and Summers would like the IRS to focus its efforts on the rich, not merely because they have more money, but also because “more of their income accrues in opaque categories like dividend income, capital gains, and proprietorship income.” If you get a paycheck from an employer, that employer also reports your pay to the government, making it hard to dodge taxes on it. But other sources of income are easier to keep from Uncle Sam. Sarin and Summers estimate that income underreporting is just 2.6 percent on average for those making under $200,000 (which is to say the vast majority of taxpayers), but 13.9 percent for those making more than $10 million.
How can the government get at more of the money it’s owed? The big tricks are increased auditing, stronger reporting requirements, and better technology.
The IRS’s budget has fallen 15 percent since 2011 after accounting for inflation; its budget specifically for enforcement is down 25 percent. The agency “has fewer auditors than it had at any point since World War II,” Sarin and Summers write, and “the share of returns that are examined declined by around 45 percent since 2011.” The amount of money raised through enforcement has declined in tandem. And IRS audits are not particularly well targeted at the highest earners: Nowadays, those earning above $500,000 are about as likely to be audited as those who receive the earned-income tax credit. The former group’s likelihood of being audited has fallen from about 8 percent in 2011 to more like 2 percent today.
The obvious solution is to bring auditing back up to where it was — and then some, especially for high earners. On average, an hour spent auditing someone who earns $5 million or more wins the government about $5,000 in unpaid taxes, while the IRS pays its employees $55 an hour. Auditing half of those earning $10 million or more, a third of those earning $5 million or more, and a fifth of those earning $1 million or more could bring in half a trillion dollars over a decade, the report estimates. Another $150 billion–plus could come from auditing corporate-, estate-, and employment-tax returns more frequently.
The second key part of the Sarin/Summers plan would attack tax evasion by improving reporting. Much as your employer tells the government what you were paid, the duo would boost “cross-party” reporting for partnerships, the self-employed, etc. Their very rough guess is that this could raise about $350 billion over ten years.
Lastly, Sarin and Summers would improve the IRS’s technology, which as it stands is something of an embarrassment:
By the end of 2017, nearly 60 percent of IRS hardware was past its useable life, and 26 percent of software was two or more releases behind the most up-to-date version. According to the GAO, the IRS Individual Master File and Business Master File systems date back to 1960 and are the two oldest IT systems in the federal government.
Beyond just keeping everything up to date, there are benefits to be had in improving the agency’s attempts to automatically flag suspicious returns. All told, Sarin and Summers peg the new revenue from tech improvements at $100 billion.
The report doesn’t dwell on the partisan aspects of these proposals, but they will be a heavy lift for Republicans. While conservatives generally support law enforcement, tax-law enforcement can be a bit of a sore spot, and Republicans supported the budget cuts that led to decreased auditing. Personally, I don’t think there’s anything wrong with actually enforcing the tax rates we set, or with scrutinizing people who earn lots of easy-to-hide income — and I would add that when the government enforces its tax laws well, it can raise the same revenue with lower rates. Rather than charging a high rate to honest people and a low rate to dishonest people, we can charge a fair rate to everyone. But rightly or wrongly, I’m not sure “ramp up auditing and target the rich” will garner a lot of GOP votes in Congress.
Further, Sarin and Summers freely concede that their numbers are highly imprecise, and they discuss the reasons that the Congressional Budget Office recently arrived at a less optimistic estimate of the payoff to increased IRS funding. For one thing, the CBO considered an auditing boost that was less targeted at the rich.
Yet it certainly seems like an experiment would be worthwhile, at least for those who don’t reflexively oppose any attempt to enforce tax laws. Fund a temporary increase in IRS enforcement, and see if the investment pays for itself many times over in higher tax collections as promised.
If it does, we’ve boosted revenue and ensured that liars with opaque income sources didn’t get an under-the-table tax cut no one else has access to. If the new money doesn’t materialize, shut it down.
