Allowing the IRS transition to fully play out solves inequality through reductions in the tax gap

The United States collects less tax revenue as a percentage of GDP than at most points in recent history, in part because owed but uncollected taxes are so significant. The tax gap also has meaningful implications for fiscal policy. These unpaid taxes mean policymakers must choose between rising deficits, lower spending on important priorities, or further tax increase to compensate for lost revenue—which will only be borne by compliant taxpayers. Currently, an under-staffed IRS, with outdated technology, is unable to collect 15 percent of taxes that are owed, and a lack of resources means that audit rates have fallen across the board, but they’ve decreased more in the last decade for high earners than for Earned Income Tax Credit (EITC) recipients. For the IRS to appropriately enforce the tax laws against high earners and large corporations, it needs funding to hire and train revenue agents who can decipher their thousands of pages of sophisticated tax filings. It also needs access to information about opaque income streams—like proprietorship and partnership income—that accrue disproportionately to high-earners. The Administration’s proposals call for significantly increasing the IRS budget, specifically $80 billion of investment over the coming ten years in enforcement, IT, and taxpayer services generating an estimated $320 billion in additional tax collections over the next ten years. To further ensure that everyone pays their fair share, the Administration also calls for using information that financial institutions already possess—without imposing any burden on taxpayers whatsoever—so the IRS can deploy these additional resources to audit more sophisticated tax evaders. These changes to the third-party information reports are estimated to generate $460 billion over a decade. In the subsequent decade, once the overhaul of the IRS is complete, these proposals combined will generate even more revenue: an estimated $1.6 trillion in additional tax revenue, just from improved collection of the taxes that are already due. This revenue will be collected in a highly progressive way, as the tax gap is more concentrated toward the top of the income distribution. Why does misreporting rise with income? In part, tax evasion is concentrated toward the top of the income distribution because higher-income taxpayers have the ability to tap into the services of accountants and tax preparers who help shield them from bearing their true income tax liability. Because these individuals know enforcement authorities lack the resources needed to pursue them, the consequences of their underpayments are viewed as minor, and so voluntary compliance rates tend to be lower.