The Internal Revenue Service released a report on how much revenue the government misses out on due to illegally unpaid taxes. According to their estimates, the figure for 2006 was around $450 billion, with 17 percent of taxes going unpaid. Around $65 billion of the unpaid taxes are recovered through enforcement, leaving a net tax gap of $385 billion. As Salvatore Babones points out, it is the wealthy who are primarily to blame for these unpaid taxes and the deficits they help cause. After all, normal workers have their earnings reported to the IRS by their employers and have their taxes withheld, making tax avoidance very difficult.
Even though withholding and reporting has been shown to reduce tax avoidance, Congress has been reluctant to require either for the kinds of income wealthier Americans generally collect. When Congress passed a law to withhold interest income, they repealed it almost immediately as the investor class cried out in horror. Congress might also reduce tax avoidance through increasing IRS enforcement; instead, Congress continues to cut the IRS enforcement budget. In 2012, they cut the enforcement budget by $193 million, and the overall IRS budget by 2.5 percent. In real terms, Congress has cut IRS staffing by one-third since 1990. All these cuts have taken place despite the fact that the IRS estimates every dollar spent on enforcement delivers $4 to $5 more in extra revenue, and delivers even more savings when spent on other things like modernization improvements (e.g. moving more and more taxes online).
The amount lost from lack of enforcement is not small either. To put it in context, the debt-ceiling debacle last summer that nearly shut down the government ultimately resulted in a deficit-reduction plan that cut spending by $2.1 trillion over the next decade. If the annual tax gap remains at the 2006 number of $385 billion per year, that is equivalent to $3.85 trillion of foregone revenue over the course of a decade. As the IRS undergoes more cuts however, that number will likely increase. If we recovered only half of those illegally unpaid taxes, we would reduce the deficit by about as much as the deficit reduction deal that nearly brought the country to a halt.
So the important question becomes why doesn’t the Congress do so? What serious arguments could be mounted against beefing up enforcement, which increases compliance with tax laws and reduces the deficit? Unless you think that the IRS numbers on the payoff of increased enforcement are fake, there are no legitimate reasons someone would oppose increasing enforcement, and in fact support decreasing enforcement through cuts as the Congress has. I suspect — as their track record indicates — those on the right do not care if the wealthy avoid paying taxes. They spend almost all their legislative effort trying to reduce the taxes of the rich; so it makes perfect sense that they would pursue that aim in ways other than statutory changes.
Just remember that the next time a deficit discussion fires up. Like commentators have rightly pointed out time and time again, conservatives in the United States are not actually interested in reducing the deficit per se. Their movement is after all the one of the starve the beast strategy. Even their pretend allegiance to rule of law — the one they are so adamant about when it comes to illegal immigration — is not enough to overwhelm their hatred of tax collection. Legally or illegally, conservatives seem pretty singularly focused on collecting as little revenue from the wealthy as possible, and lax tax enforcement is one of the ways they are succeeding in doing so.