In the wake of Donald Trump’s election and accompanying Republican control of the House and Senate, the Internal Revenue Service (IRS) has found itself thrust back into the spotlight. Recent cuts to the agency’s funding, totaling $20 billion, as part of a deal to prevent a government shutdown, have raised concerns over further reductions in the enforcement budget in the upcoming Congress. While Democrats argue that diminishing IRS resources will be detrimental to federal revenues and tax fairness, Republicans view these cuts as a step towards limiting the government’s reach.
However, amidst this political debate, one crucial aspect often overlooked is the significant impact of adequately funding the IRS on the U.S. economy as a whole. Years of underfunding have resulted in a staggering unpaid tax bill of around half a trillion dollars annually. This massive sum not only hampers revenue generation but also creates an uneven playing field within the economy, favoring businesses and individuals who evade their tax obligations.
Here are the key points to consider regarding the implications of underfunding the IRS on the U.S. economy:
- Disproportionate Tax Burden: Businesses with the means and motivation to evade taxes bear a significant portion of the unpaid taxes, distorting the economic landscape.
- Subsidizing Tax Evasion: Unpaid taxes effectively subsidize those who evade them, providing them with an unfair advantage in the market.
- Economic Distortions: Tax evasion leads to distortions in economic activity, favoring certain industries and occupations over others.
- Competitive Disadvantages: Companies that comply with tax obligations face competitive disadvantages against tax-cheating businesses that can profitably expand by evading taxes.
- Deadweight Loss: The resources dedicated to tax evasion, such as setting up shell companies and falsifying documents, represent a wasteful deadweight loss for the economy.
In essence, widespread tax evasion not only undermines the integrity of the tax system but also hampers the efficiency and productivity of the economy as a whole. By adequately funding the IRS to enforce tax compliance, the nation can promote fairness, boost revenue, and foster a more effective and productive economic landscape.
It is imperative that both sides of the political spectrum recognize the critical role of a well-funded IRS in ensuring a level playing field and maximizing economic growth. Investing in tax enforcement is not just about fairness and revenue; it is about safeguarding the efficiency and prosperity of the entire economy.
Authored by Ben Harris, Vice President and Director of Economic Studies at the Brookings Institution and former Assistant Treasury Secretary for Economic Policy.
Leave feedback about this