The Sequester and the Craziness of Cutting the IRS Budget if You’re a Deficit Hawk

by Brian Wolfman

Think about these things:

  • The "tax gap." In 2006, the "tax gap" — the difference between the taxes owed by Americans and the taxes that they pay — was a stunning $450 billion. The IRS then went out and enforced the tax laws and recovered $65 billion, making the net tax gap $385 billion. We've posted about the tax gap before. In all, the IRS collects only about 83% of what is due. The IRS itself is pretty open about the tax gap. View the IRS's wonderful tax gap map, showing the sources of the tax gap. (For instance, $28 billion comes from folks who just don't file tax returns — that is, total scofflaws.) The chart below simplifies the map.
  • Tax enforcement works. We could never eliminate the gap. Not all cheaters and honest-mistake-makers can be caught. And we don't want to turn the country into a police state trying to close the gap. But tax enforcement works. For every dollar spent on enforcement, four dollars are recovered.
  • The sequester will reduce tax revenue. Like most federal agencies, the IRS has been squeezed in recent years. Because of budget cuts, it has lost 10% of its workforce through attrition in just the last two years. That means fewer people to help taxpayers figure out the law and file proper returns and fewer people to promptly process tax refunds. If the sequester goes into effect, it will require the IRS to furlough lots of employees, including those in enforcement. That means more cheaters will go undetected, and it probably means more cheating in the first place. It means, almost without doubt, a bigger tax gap. And that means a bigger federal deficit, exactly what the sequester, in its meat-cleaverish way, is supposed to reduce. That's downright nutty.

Read more about these and related issues in Rachael Bade's article at Politico.

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