Closing the “tax gap,” or revenue owed to the federal government that goes uncollected, has long been a favorite deus ex machina for lawmakers who want more revenue without having to raise rates. But Internal Revenue Service (IRS) Commissioner Chuck Rettig really put dollar signs in lawmakers’ eyes when he claimed the tax gap could be as large as $1 trillion. Always eager to appear knowledgeable on policy issues, Sen. Elizabeth Warren is putting forward a plan to collect extra revenue that only gets worse the deeper you dig into it.
First and foremost, it’s important to understand how far off on an island Rettig is with his estimate. The IRS’s last official estimate of the size of the tax gap placed it at a far, far lower $381 billion. Even considering that this estimate may not have factored in underpayment from cryptocurrencies, offshore holdings, and pass-through businesses, the tax gap still remains far closer to $500 billion than to $1 trillion.
And while Rettig was certainly lobbying for increased funding, his agency may not be well prepared for it. The agency is currently trawling through abacklog of 30 million tax returns, many of which date to 2019, in no small part because the IRS has failed to modernize and suffers from a lack of working printers and copiers. Clearly, this is not an agency prepared to take on a whole host of new responsibilities, increased funding or no.
Nevertheless, Warren’s proposed Restoring the IRS Act would ask the IRS to do just that. Under Warren’s legislation, the IRS would see a massive annual funding increase of nearly 165 percent, from $11.9 billion in FY 2021 to $31.5 billion thereafter. Moreover, this $31.5 billion in funding would be made mandatory rather than being subjected to the appropriations process, meaning that funding for the agency would run on autopilot instead of being monitored regularly by Congress.
With this funding increase, Warren estimates that the IRS would be able to collect $1.75 trillion in additional revenue over the next decade. That’s way out of step with other estimates.
The Congressional Budget Office (CBO), the federal nonpartisan budget scorekeeper, estimates that increasing IRS enforcement funding by $20 billion over a decade would yield $61 billion in additional revenue, while increasing funding by $40 billion would yield $103 billion.
Warren, meanwhile, is betting that she can raise that $1.75 trillion by increasing IRS funding by $315 billion. Not only would that greatly exceed the rate of return estimated by CBO, it also imagines that so much increased funding could continue to yield substantial returns. As the CBO estimates show, it’s likely that the revenue to be gained from increased enforcement funding would fall off rather quickly.
Unfortunately, bad math is far from the only shortfall of Warren’s plan. Warren would also extend the False Claims Act, a law intended to combat fraud by federal contractors, to tax misstatements for taxpayers with incomes above $10 million. This would allow private citizens to sue taxpayers above that income threshold on behalf of the government and, should they win, receive a cut of the penalty that that taxpayer owes. Considering how much of the tax gap comes from errors and inadvertent mistakes, this would be a profoundly Orwellian change.
If one wonders why Commissioner Rettig made such an outlandish estimate of the size of the tax gap with seemingly no data to back it up, the flurry of politicians tripping over themselves to throw money at the agency that has ensued would appear to provide the reason. Americans counting on their representatives to be good stewards of their tax dollars had best avert their eyes.