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The Substantial Revenue-Raising Potential of Tax Compliance Efforts

By: Natasha Sarin, Deputy Assistant Secretary for Economic Policy

Today, the “tax gap”—the difference between taxes owed to the federal government and taxes collected totals around $600 billion annually. Over a decade, left unaddressed, we will lose $7 trillion from those who fail to pay what they owe. This tax gap is not distributed evenly: unpaid taxes are concentrated at the top because, although American workers are already fully compliant with their tax obligations, the wealthy who accrue income in opaque ways often are not.

In other words, some of the wealthiest taxpayers are cheating every other taxpayer. This means that giving the IRS the resources and information that it needs to pursue evasion will generate significant revenue in a highly progressive way.

As part of the Build Back Better framework, the Administration, as well as House and Senate leadership, and a broad swath of members of Congress have coalesced around a set of revenue raisers that will ask the wealthy and large corporations to pay their fair share, while funding much-needed investments in American children and workers and helping us meet our climate goals. A significant component is providing the IRS with the resources it needs to pursue high-end evasion, modernize antiquated technological infrastructure, and invest in taxpayer services.

Acting Assistant Secretary for Tax Policy Mark Mazur has pointed out that the revenue potential of the Administration’s proposal to provide $80 billion of funding to the IRS conservatively totals around $400 billion (net) over the course of the next decade. This reflects the fact that increasing enforcement resources results in a direct increase in tax collections from additional examinations of high-income taxpayers, complex partnerships, and large corporations. It also reflects the fact that an increase in enforcement resources changes taxpayer behavior: As would-be-evaders realize they are more likely to be caught, they will be more voluntarily compliant in the presence of a revitalized IRS.

This $400 billion estimate is conservative in several ways. It assumes a relatively small deterrence effect compared to the empirical evidence. It also only focuses on the revenue-raising potential of additional enforcement dollars, while much of the proposed investment in the IRS would be in taxpayer services and technology. In reality, upgrading outdated IRS systems to increase the efficiency of the agency—and investing in taxpayer services so that filing questions can be answered promptly—will improve compliance meaningfully.

Even more revenue can be generated by asking banks to report two additional pieces of information per year on a form they already prepare. This would provide the IRS the information that it needs to leave more law-abiding taxpayers alone, and target enforcement scrutiny where it belongs: on those who don’t pay the taxes they owe.

We will continue to work with leaders in Congress to enact these important measures.