IRS Math: $600 Million = $4 Billion

A few years back, we argued that Americans should want more IRS audits, not fewer. “Still, unless you are personally cheating by one-fifth or more, you should be mad at the I.R.S. — not because it’s too vigilant, but because it’s not nearly vigilant enough,” we wrote. “Why should you pay your fair share when the agency lets a few hundred billion dollars of other people’s money go uncollected every year?” Now, the IRS may be doing even fewer audits, thanks to political efforts to cut the agency’s budget. In fact, “IRS Commissioner Doug Shulman told the committee Tuesday that the $600 million cut in this year’s budget would result in the IRS collecting $4 billion less through tax enforcement programs.” On the other hand, it will make tax cheating a bit more attractive. (HT: Meir Lindenbaum)

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  1. Trevor L says:

    Wow, way to not point out that Pres. Obama and the Democrats actually want to increase the IRS’s budget, but the Republicans are trying to cut the budget.

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  2. Jeremy Cloud says:

    You have only quoted the IRS Commissioner about this. Nice perspective. Imagine telling a marketing firm that you are cutting back on advertising and they will tell you you’ll lose money on a net basis. It’s axiomatic and not revealing. The point is the IRS consumes countless hours and dollars every year from the taxpayers. Frankly, I’m happy they have less money to hassle honest tax payers every year, even if it means some criminals get away with paying less.

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    • Ryan K says:

      Jeremy would be an interesting case study. He is well-intentioned in eliminating something to close a budgetary gap, but is instead creating a condition that will directly lead to a larger budgetary gap. Why would an “honest tax payer” favor a policy that encourages dishonest behavior? Maybe its not a 6x return on investment, but even if it were half that, doesn’t it still make economic sense? Where is the utility being generated in this scenario?

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      • Dan says:

        ” Why would an “honest tax payer” favor a policy that encourages dishonest behavior?”

        Going out on a limb here (I’m not Jeremy, after all), but I believe it’s because the honest taxpayer, even when making a filing that is correct to the best of his or her knowledge, must go through an absolutely nightmarish, nerve-wracking experience when being audited by the IRS. The personal discomfort is out of all proportion to the remote, nebulous notion of “budgetary gap.”

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  3. Brian Hill says:

    Or we could simplify the tax code so THERE ARE NOT so many ways to cheat

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    • Matt says:

      I think you might be confusing tax avoidance and tax evasion. A simpler tax system would reduce the former while audits generally target the latter.

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  4. Dan Marcin says:

    Well, you’re measuring the administrative cost to the IRS, but you’re not mentioning the compliance cost for the taxpayers. So this might actually be social welfare maximizing.

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  5. Malvolio says:

    You’re comparing apples and oranges. The $600 million is money spent. It’s gone — shattered to pieces, or poured into the stratosphere, or sank in the depths of the sea, in Orwell’s memorable formulation — and it’s not coming back. The $4 billion, on the other hand, isn’t value created. It’s just money transferred from one pocket (mine) to another (the government’s), and according to the IRS, just incentivizing that transfer costs 15%.

    Worse, the process of an audit is always grueling and stressful, even for someone who isn’t cheating on his taxes. That’s a real cost. Even at its best, a system of frequent audits just shifts the burden from the honest to a combination of the honest and the timid. I suppose that is something of an improvement.

    Overall, I don’t see why the actual allocation of costs (including taxes paid and audits endured) is automatically or inherently better in a frequent-audit system than in an infrequent-audit system.

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    • Alex says:

      Not really. The $600 million largely goes to pay IRS employees and contractors, who then take that money and spend it in malls and on cars and college for their kids and put it in their 401k’s. Then the mall money pays for the paychecks of the people who work at the mall, and the profits of the companies that sell the goods, etc. etc. etc. Likewise, the $4b in taxes goes to pay for transportation projects that pay construction workers, medicare benefits that pay health care staff, military spending that pays soldiers, etc. etc. etc. Money never disappears unless you actually stuff cash under a mattress and forget about it.

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    • Not Quite says:

      It is interesting that you see the $4B as a transfer of wealth, but the $600M as something different entirely. Surely, those IRS agents that are paid out of that $600M use their salary to purchase goods and services?

      This is a common argument being thrown about these days, that government expenditures are simply expenditures that are lost to the stratosphere (as you put it). Truth is, government expeditures represent a quid pro quo. The money is hardly lost to oblivion, and any argument otherwise is either disingenuous or ignorant.

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    • Dan says:

      How is it that the 600 million dollars is “shattered to pieces”? They aren’t throwing the money into an incinerator (though, that would not really result in lost wealth, but I digress). The money is used to pay employees and buy office supplies. Are government employees not real people part of the economy? While yes, it would result in more harassment, it is unlikely that most of those being harassed are not the “honest tax payers,” as Jeremy so charitably called them. The $4 billion is money transfered from those who own money to those who are owned– everyone who actually pays their taxes.

      It seems obvious that Republicans are playing to their base by cutting the budget of the program most symbolically intrusive. For those who have a visceral hatred of all things government, the IRS evokes images of dark-suits kicking down doors and robbing helpless Americans.

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    • Dr. Van Nostrand says:

      @Malvolio From that perspective the $600 million isn’t gone either, it is just transfered from one pocket (the government’s) to another (auditors and others working at the IRS). Maybe we should call it the only stimulus program that could directly increase government revenue.

      Also I imagine that there is some value created for honest taxpayers knowing that more people are paying their fair share. Not sure that is worth the time and effort spent auditing but its not worth nothing.

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  6. rick says:

    This should be a straightforward ROI analysis. For every dollar spent on auditing how much additional revenue is recovered?

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    • Colin Young says:

      I saw a figure a year or so back (maybe in the Economist), but IIRC, it was something like $8 for every dollar invested. Obviously at some point you’re going to capture every uncollected dollar so you can’t just keep pouring money into the IRS, but it seems that there is a pretty big pool of owed taxes that aren’t being collected.

      The real problem is the reaction people have to increasing audits (just look at some of the other comments here). In reality if you’re reporting and filing your taxes honestly you aren’t likely going to be audited (and apparently, as it appears things are going, even if you aren’t reporting honestly). Maybe we need to introduce a system where if you are audited and you have in fact done things correctly (and allow for some wiggle room for honest mistakes that a reasonable person could be expected to make given the complexity of the tax code), you get a bonus of some sort to compensate you for the stress and cost of the audit. Why not take, say, 10% of the additional taxes recovered through audits and distribute that to the honest taxpayers who had to undergo an audit?

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  7. Carl T says:

    Political economics proves that when presented with a budget cut political agents will always propose to cut the most visible, valued, and meaningful aspects first so as to public pressure to preserve their empire. To be so silly as to believe this is laughable. ‘Don’t cut the schools or we will cut football and band’…

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  8. Jeff says:

    The relationship between IRS auditing and tax avoidance is documented in the literature (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1668628). However, as Dan Marcin suggests, this loss of revenue does not suggest an unambiguous loss of social welfare due to under-auditing. Auditing consumes real resources in society, whereas it produces nothing–it merely shifts wealth from taxpayers to the government. The optimal auditing policy is not the one that maximizes revenue for the state, but rather, the one that maximizes societal welfare.

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    • Joshua Northey says:

      All sorts of things consume real resources in society without contributing to welfare other than shifting wealth, this is what 90% of the financial services sector is. We don’t seem to raise eyebrows at those transactions?

      All that matters is that there is a rule and the rule should be followed. It is horrible social policy to have a tax code and then not enforce it. As to what that code should be, that is a legitimate debate, but fostering a climate of tax avoidance is a feature of many societies that quickly ran into large problems.

      The IRS should have any and all resources it needs to police the tax code, and if that is deemed to be too many resources we should change the code to a more easily enforced one (I would love a consumption/carbon tax instead of an income tax).

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