The Washington PostDemocracy Dies in Darkness

Opinion Republicans say they want to cut debt, but tax plans say the opposite

The IRS building in D.C. on March 22, 2013. (Susan Walsh/AP)
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Natasha Sarin, a Post contributing columnist, is an associate professor of law at Yale Law School with a secondary appointment at the Yale School of Management in the Finance Department. Previously, she served as deputy assistant secretary for economic policy and later as a counselor to Treasury Secretary Janet L. Yellen. Mark J. Mazur served in various roles at the Treasury Department in both the Biden and the Obama administrations, including as assistant secretary for tax policy. From 2017 to 2021, he was the director of the Urban-Brookings Tax Policy Center.

Here’s one more indicator, if anyone needs one, that House Republicans’ newfound fiscal responsibility isn’t all it’s cracked up to be: Their debt ceiling demands include a proposal that will balloon the debt — and by much more than previously understood.

A key provision of the GOP’s proposed Limit, Save, Grow Act would rescind most of the $80 billion in additional funding the IRS received in the Inflation Reduction Act to tackle high-end tax evasion. The Congressional Budget Office calculates this move would increase the deficit by more than $100 billion over the course of the next decade.

The reality is even more dire.

In new work, we estimate how much additional revenue the IRS is likely to collect as a result of the extra funding and, conversely, how much revenue would be lost if House Republicans’ proposal became law. We conclude, very conservatively, that the additional funding would shrink the tax gap (the difference between taxes owed and taxes collected) by nearly $500 billion over the next 10 years — and about $1.5 trillion over the course of the next two decades. Without this funding, federal budget deficits would increase by approximately this amount.

What drives the differences between our estimates and official government estimates? We were both engaged with these issues as Treasury Department officials during the period that the Biden administration was making the case for adequately funding the IRS (Mazur as acting assistant secretary for tax policy, Sarin as Treasury’s counselor for tax policy and implementation). So, we saw firsthand the ways that the impact of additional investment in the IRS is underestimated or even ignored by government estimators.

For example, models used by these estimators fail to account for the fact that investments in service and technology will improve voluntary compliance. It seems intuitive that because the IRS could answer 87 percent of the calls it received this year (thanks to new Inflation Reduction Act resources), it has been able to help more taxpayers than it could last year, when just over 10 percent of telephone inquiries were answered. And yet because the compliance benefits from these gains have historically been hard to quantify, they aren’t reflected in official tallies of the impact of these investments.

Official government estimates also largely neglect the behavioral or deterrence effect arising from an IRS enforcement presence in areas where it was previously lacking: To highlight two examples, for businesses organized as partnerships, the IRS audited fewer than 0.05 percent of returns in 2019. For those making more than $10 million annually, the Government Accountability Office reported, the audit rate was just 4 percent, down nearly 80 percent in the previous decade. Having more tax cops on the beat improves revenue in two ways: Taxpayers who make errors that the IRS identifies are unlikely to repeat them in future years, and taxpayers faced with a well-functioning and well-resourced IRS will be more likely to follow the law.

Past Treasury Department estimates have suggested the positive impact on tax revenue of this kind of deterrence effect can be about three times the impact from more direct actions, such as increased audits. Our calculations were much more conservative.

So, even though our estimate of the lost tax revenue resulting from the Republican plan is much higher than the Congressional Budget Office estimate, even our calculation is likely understating the true impact. As one way of seeing this, consider that we estimate that the IRS will capture about 7 percent of the total tax gap through the new $80 billion in Inflation Reduction Act investments — relatively minor progress, given the scope of the existing tax evasion problem.

Critics of the IRS have demonized the nation’s tax administrator in recent years. Some in Congress have fearmongered, asserting that the IRS will use the additional funding to deploy armed revenue agents to harass ordinary Americans rather than deploy well-trained accountants to address sophisticated forms of tax evasion by corporations and the wealthy, as the treasury secretary has directed — and the agency has committed to do. It is no surprise that since 2020, the IRS’s favorability has dropped by more than one-third, from 65 percent to 42 percent.

The anti-IRS movement shows how some politicians have created a tax system that advances the interest of high earners. That is not a winning policy approach, as most Americans are frustrated that corporations and wealthy people do not pay their fair share.

Nor is this movement (obviously) a winning strategy to address our nation’s debts. Speaker Kevin McCarthy (Calif.) and his fellow House Republicans should be asked why their proposal seeks to implement a policy that will make our tax system less equitable and our fiscal situation worse — not better.