Cutting IRS Jobs Helps Rich Tax Cheats And Hurts Honest Taxpayers

The following is part of an article by Natasha Sarin in The Washington Post:

The U.S. DOGE Service estimates that its actions so far have saved taxpayers about $100 billion. These estimates have been riddled with errors, and their accuracy cannot be verified.

But even if these savings are to be believed, they pale in comparison to the amount of money DOGE is about to lose. Just one move — the plan to shrink the Internal Revenue Service’s staff by up to 50 percent — would, very conservatively, lead to a $400 billion increase in uncollected taxes over the next decade. It could easily mean more than $2 trillion in losses.

Today, the IRS fails to collect about $700 billion in taxes owed each year. We know that going after tax evaders has huge returns: Recent academic work suggests that every dollar spent on auditing people in the top 10 percent of earners returns $12. Prior estimates from the Treasury Department’s inspector general suggest that each additional hour spent auditing a high earner generates nearly $5,000 in additional tax revenue.

The IRS can do a lot more of this work. Today, its audit rate of partnerships (businesses that aren’t taxed as corporations because they pass their income through to partners) is 0.1 percent. The IRS has historically been unable to pursue high-income “nonfilers” — people who do not file taxes at all — because it doesn’t have enough personnel or up-to-date technology. Yet that is the easiest type of evasion to detect, and not pursuing it has cost the agency tens of billions of dollars.

Practically, we do not know how the IRS plans to shrink its workforce by 50 percent. But we do know it would blow a hole in the federal budget because it would mean less capacity to do high-return work, such as auditing the wealthy. If we assume the staffing reductions would affect all of the agency’s activities, that would mean half as many people answering the phones and half as many auditors in the field.

Tax season will be much less efficient without these employees. Just a few years ago, an understaffed IRS took years to process pandemic-era returns filed on paper, and during the 2022 filing season, it answered fewer than 20 percent of the calls that taxpayers made. Then, the agency had around 79,000 employees. The Trump administration is considering shrinking it to more like 50,000 employees — staffing at levels not seen since 1960, when the U.S. population was 160 million people smaller than it is today. . . .

Estimates from the Budget Lab at Yale, which I run, suggest that cutting the IRS by 50 percent would cost the agency nearly $400 billion ($350 billion net, once fewer salaries are accounted for) over the next decade. These estimates include both the direct losses to the agency from fewer audits and a conservative adjustment for “indirect” losses for the agency once its enforcement activity is depleted — i.e., people tend to be more comfortable running a red light if they don’t see any traffic cameras.

Much is uncertain, but here is an alternative, back-of-the-envelope estimate: Assume that a depleted IRS would lead taxpayers to evade more. If high-compliance taxpayers became medium-compliance taxpayers, and medium-compliance taxpayers became low-compliance taxpayers, losses could easily total well above $2 trillion, or about a 25 percent increase in unpaid taxes.

Beyond the revenue losses, such a tax system is inequitable. Americans who earn wages would still be fully compliant with their tax obligations, as their taxes are withheld. But those who earn income in opaque ways would have carte blanche to cheat, with a paucity of tax police on the beat. Those are disproportionately higher earners: Nearly 30 percent of unpaid taxes, or about $200 billion annually, comes from the top 1 percent. (The bottom 20 percent underpays by just $2 billion.)