Lower Tax Rates or Less Tax Enforcement?

Lower Tax Rates or Less Tax Enforcement?

Timothy Taylor 14/07/2020 1
Lower Tax Rates or Less Tax Enforcement?

Let's compare two hypothetical tax cuts. In the first tax cut, we decide which groups will pay lower rates, and we may have a dispute over what share the tax cut should go to those with low incomes, or families with children, or as an incentive for job training or research and development or some other purpose.

In the second tax cut, we announce that those who are willing to take the risk of breaking the tax laws can pay less, but everyone else will pay the same. 

I prefer the first form of tax cut, and I suspect I am not alone in that preference.  But by reducing funding to the IRS in the last decade or so, we are in fact choosing the second form of tax cut. The Congressional Budget Office lays out the evidence in "Trends in the Internal Revenue Service’s Funding and Enforcement" (July 2020). Here are some bullet-points to consider from CBO: 

  • In its most recent report on uncollected taxes, the IRS estimated that an average of $441 billion (16 percent) of the taxes owed annually between 2011 and 2013 was not paid in accordance with the law. Most of the unpaid taxes were the result of taxpayers’ underreporting their income. Through enforcement, the IRS collected an average of $60 billion of those unpaid taxes annually, reducing the gap between taxes owed and taxes paid in those years to $381 billion per year, on average.
  • The IRS’s appropriations have fallen by 20 percent in inflation-adjusted dollars since 2010, resulting in the elimination of 22 percent of its staff. The amount of funding and staff allocated to enforcement activities has declined by about 30 percent since 2010.
  • Since 2010, the IRS has done less to enforce tax laws. Between 2010 and 2018, the share of individual income tax returns it examined fell by 46 percent, and the share of corporate income tax returns it examined fell by 37 percent. The disruptions stemming from the 2020 coronavirus pandemic will further reduce the ability of the IRS to enforce tax laws.
  • CBO estimates that increasing the IRS’s funding for examinations and collections by $20 billion over 10 years would increase revenues by $61 billion and that increasing such funding by $40 billion over 10 years would increase revenues by $103 billion.

Unsurprisingly, most Americans don't have a lot of room to fiddle with our taxes. Our employer reports our pay to the IRS; our bank reports our meager interest income; other parts of the financial industry report if we had any capital gains or other financial benefits in the year. However, those who receive income in forms not separately reported by third parties--like income for the proprietors of a business, or from royalties or rents--have much more ability to understate their income. 

Most of the drop in enforcement relates to a lower chance of close inspection of the tax returns of high-income individuals and large corporations. 

Lower Tax Rates or Less Tax Enforcement?
Lower Tax Rates or Less Tax Enforcement? 

Notice that the comparisons given do not go back decades, but only about a decade.  Maybe I'm just not remembering clearly (always a possibility!), but it doesn't seem to me that the perennial complaints over the intrusiveness of IRS enforcement were higher than usual in 2010. I also don't remember any policy consensus that a reduction in tax enforcement would be a bipartisan policy choice over the decade following 2010. Raising IRS enforcement spending 20%, so it returns to 2010 levels, does not seem excessive or onerous. And although many government tax and spending policies claim to "pay for themselves," this one actually does so. 

Lower Tax Rates or Less Tax Enforcement?
A version of this article first appeared on Conversable Economist

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  • Keith Langton

    Interesting read

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Timothy Taylor

Global Economy Expert

Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.


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