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Politics & Policy

No, Better Tax Enforcement Will Not Raise $400 Billion

A security camera hangs near a corner of the U.S. Internal Revenue Service (IRS) building in Washington May 27, 2015. (REUTERS/Jonathan Erns)

In the brief interval since my last post, Congress released some legislative text on the Build Back Better Act. Now, we can put some numbers to their claims on tax enforcement.

Here’s a rundown of where Democrats have been on increased revenue from better tax enforcement:

  • In April, the White House said better tax enforcement could raise $700 billion over the decade.
  • In May, the Treasury department reiterated $700 billion. They also said that would result from $80 billion in extra IRS funding, so subtract $80 billion to get a net revenue gain of $620 billion. Treasury thought that was a conservative estimate.
  • In June, the White House offered “reduce the IRS tax gap” as a way to finance the bipartisan infrastructure deal, not the reconciliation bill. It did not put a number on how much revenue it would raise.
  • In July, the Washington Post reported that some congressional Democrats were saying they thought better enforcement would raise $1 trillion over the decade.
  • In August, the White House reiterated that better tax enforcement was an offset for the bipartisan infrastructure bill. Again, it did not put a number on how much revenue it would raise.
  • Earlier this month, Jen Psaki said the top 1 percent of income earners “are responsible for $163 billion a year in owed but unpaid taxes.” That would mean that if the IRS collected all of that every year, they’d raise $1.63 trillion over ten years. Of course, no enforcement measure is going to have 100 percent success, so consider as reference points that 50 percent success would mean $815 billion in revenue, and 30 percent success would mean $489 billion.
  • Today, the White House listed “IRS Investments to Close the Tax Gap” as the largest single pay-for in the reconciliation-bill framework. It says that will raise $400 billion in revenue.

As you can see, Democrats have been all over the place on how much money better tax enforcement will raise and what that revenue will be for. If the revenue gained from closing the tax gap is funding the bipartisan infrastructure bill, it can’t also fund the reconciliation bill. And their current estimate of $400 billion makes the Treasury’s “conservative” $700 billion estimate from May look silly.

The legislative text we have increases the IRS budget by a total of about $80 billion, which is the same number the Treasury was basing its estimate on in May. Of that, about $45 billion would go to enforcement, and about $27 billion would go to operations support, which would aid enforcement among other things.

Tax enforcement is a question the Congressional Budget Office (CBO) has looked at multiple times before. Their estimates are consistently lower than even the Democrats’ lowest claim. (Numbers may not sum perfectly due to rounding.)

  • In 2011, the CBO estimated that $13 billion in spending on better enforcement would raise $56 billion in revenue, for a net gain of $42 billion.
  • In 2016, the CBO estimated that $18.7 billion in spending on better enforcement would raise $55.3 billion in revenue, for a net gain of $36.6 billion.
  • In 2019, the CBO again estimated $42 billion in new revenue from better tax enforcement.
  • In 2020, the CBO gave a two-tier estimate. It said that $20 billion in spending on better enforcement would net $41 billion in revenue, and $40 billion in spending would net $63 billion in revenue.
  • In September, the CBO estimated that increasing IRS funding by $80 billion would increase revenue by $200 billion, for a net gain of $120 billion. That estimate assumed $60 billion of the overall budget increase went to fund better enforcement.

CBO’s estimates have been fairly consistent over time, relative to the scale of expenditure. They always exhibit diminishing returns to scale. That’s because they assume that the IRS would go after easier cases first and that more tax cheats would comply voluntarily if they knew they had a higher chance of getting caught.

The CBO has also been fairly consistent across administrations. The first two estimates listed came out when Obama was president, the next two when Trump was president, and the last one was during the present administration. The estimates are not influenced by who is asking for them.

The people with an incentive to lie to you are saying better tax enforcement would raise $400 billion, after previously throwing around $700 billion and possibly $1 trillion. The people without that incentive have consistently found smaller increases in funding for enforcement would raise around $40 billion, and that a larger increase (similar to the one in the bill) would raise $120 billion.

It’s no wonder Democrats want to pass this bill before the CBO has a chance to chime in again.

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