To make money, spend money — on the IRS

How do you raise tax revenue without raising taxes? By increasing enforcement of existing tax law and making sure every penny already owed gets paid.

President Joe Biden is crafting a $3 trillion spending plan focused on infrastructure and other priorities. To their credit, Democrats have also been floating options to pay for it. These include raising tax rates on corporations, capital gains, estates and high-income individuals’ earnings.

All worthwhile ideas. But there’s some lowerhanging, revenue-raising fruit that has not featured prominently in leaks from the White House or Capitol Hill: giving the Internal Revenue Service more money.

Increasing spending to help pay for spending may seem counterintuitive. It makes more sense when you consider that every additional dollar invested in the IRS generates a $6 return, according to Treasury estimates, by enabling the agency to detect and collect tax bills already owed.

By inadequately funding the IRS, we’re leaving money on the table.

Thanks to years of budget cuts, the overall IRS budget is about 20% below its level a decade ago in inflation-adjusted terms. Meanwhile, the agency has been given more and more responsibilities. These include implementing the Foreign Account Tax Compliance Act, combating identity theft and tax-refund fraud, dispensing multiple rounds of pandemic stimulus payments, and, possibly very soon, issuing monthly cash payments to families with children.

With fewer resources available to handle all these duties, something had to give. That something turned out to be enforcement. Tax cheats can now get away with murder — or at least the ability to substantially shortchange Uncle Sam.

The number of IRS revenue agents — the auditors qualified to examine complex returns — has plummeted 43% over the past decade, according to a report from Syracuse University’s Transactional Records Access Clearinghouse. Audit rates of those filing these complex returns have also sharply declined.

For example, the number of millionaires who were audited in fiscal 2020 was about a quarter of the number from fiscal 2012. Accordingly, these IRS audits turned up unreported tax bills of $1.2 billion last year, about a quarter of the $4.8 billion found in fiscal 2012.

Likewise, the share of corporate giants — those with at least $20 billion in assets — being audited declined to 38% last year from 93% in fiscal 2012. Those IRS audits had turned up $4.1 billion in unreported taxes owed in 2020, compared with about $10 billion in 2012.

These numbers are presumably not declining because wealthy people and corporations have suddenly become more scrupulous about paying exactly what they owe. They know the IRS is outgunned; if anything, cutbacks in IRS audits and declining referrals for criminal prosecution have emboldened tax cheats — or at least encouraged well-heeled filers and the armies of tax experts they employ to attempt increasingly aggressive interpretations of the law.

The more conspicuous this lack of enforcement gets, the more additional people are likely to duck their tax duties. This has happened in other countries, such as Greece and Italy, where perceptions that everyone else is shirking have led to cascading tax evasion. No one wants to be the only chump left following the law.

Estimates for the size of the U.S. “tax gap”

— the difference between what’s owed and what’s collected — vary. By one estimate, from economists Natasha Sarin, who was recently appointed to a post at Biden’s Treasury Department, and Lawrence H. Summers, the former treasury secretary who is also a Washington Post contributing columnist, the IRS will fail to collect nearly $7.5 trillion of legally owed taxes over the next decade. Even that may understate the amount of evasion. A new paper co-authored by IRS employees suggests the ultrawealthy may be hiding more money abroad than had been previously estimated.

Investing in the tax enforcement workforce, IT improvements and increases in third-party reporting could help shrink the tax gap. These actions would help detect existing fraud and discourage future bad behavior. Remember that $6-to-$1 return on investment for additional IRS funding? That ratio doesn’t even include the deterrence value of increased enforcement. Treasury estimates those effects to be “at least three times” greater than the direct impact on revenue.

IRS budget cuts over the past decade were driven by Republican politicians, but Republicans, too, should support increasing IRS resources, regardless of whether Biden’s spending plans ever become law. After all, funding the IRS could help shrink deficits without raising taxes on any law-abiding taxpayer. It could also restore greater faith in the fairness and efficiency of our federal government.

Republicans have shown great interest in rooting out “waste, fraud and abuse” when it comes to food stamps and other programs used by the poor; one hopes they would demonstrate symmetric interest when those ills are practiced by the wealthy.