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Is the IRS underfunded?

Write-Off: The Tax Blog

In classes I teach, at least once a semester, an issue will come up where I will ask the question, “when was the last time you heard of a government bureaucracy saying it is well-funded, and needs no more money?” The answer I share, and, that my students reply with before I share, is “basically never.” This is not only true of government organizations, but, basically every organization—all think they are underfunded, could use more money, etc. With this in mind, I hear the increasingly frequent claims that the IRS is underfunded.

It is true that the marginal revenue produced by a marginal dollar into the IRS budget is much more than one, and, given that fact, if the IRS were a business, we should keep investing in it. But, the IRS is not a business. While it is true we should not think about investing in the IRS as we thinking about investing in a business, in my opinion, we should likely increase funding to the IRS. Why?

My opinion is based on an accumulation of facts, and my personal judgements based on my values. Here are some:

  1. Part of this opinion is based on the social return to more revenue compared to the social cost of less money in the private sector (where, we are keeping in mind, the parties who are paying more in taxes were tax non-compliant to begin with, and, where we have empirical reason to believe that the hassle costs of audits are borne most heavily by the non-compliant). Most important to me, with more tax collected of the tax owed, we could plausibly have a lower statutory marginal tax rate and collect the same amount of revenue (or, we could avoid raising taxes even more than folks who like tax raises would like to do). This would induce less distortion, and, may engender less aggressive tax schemes that rely on audit-lottery like thinking.
  2. When we want to make comparisons, we can make cross sectional comparisons, or, cross temporal comparisons. First, a cross-sectional comparison: How does IRS funding look compared to funding of Her Majesties Revenues and Customs (the IRS of the U.K., and, the tax authority with my favorite name)? These comparisons are tricky, as different tax authorities have different responsibilities, but, for example, 0.93 out of every 1,000 U.K. residents were employees of HRMC, compared to 0.22 out of every American. In China, every 0.54 of every Chinese work for a tax authority (this number does include sub-national level tax authorities). Again, the duties of tax authorities and the existence of subnational level taxes (states, for example, in the U.S.) make it tricky, but, these are pretty big gaps to explain. I also recognize that perhaps the IRS is much more efficient than these other countries, and simply does not need as many people, as with compute matching, third party information return, etc., actual people are obviated. I don’t think that is the case, and, the across time comparison is informative here.
  3. Across time comparisons also make the IRS looking underfunded, as the IRS has had a total budget between $11.7 and $11.8 billion between 2016 and 2020. The budget went down in nominal terms three of those four years, then came back up a bit. Can you imagine any other large organization that is serving a growing population with a tax system that is increasingly complex (FATCA mandates, ACA mandates, TCJA—a huge tax change, etc.) having a budget that is basically flat for four years? And, the $11.7 and $11.8 billion figures are nominal terms—not adjusted for inflation. If you start with $11.7 in 2016, and adjust for inflation over those four years, the 2020 budget should be well over $12.5 billion, just to keep up with inflation.
  4. As can be expected with declining marginal productivity, the IRS is pretty efficient in what it currently does, at least, compared, again, to HMRC. It costs HMRC 0.54 pounds to collect an extra 100 pounds in revenue, and, it costs the IRS 0.33 dollars to collect an extra dollar (both in 2019). The Australian Taxation Office (aka as the RDUs, the Revenuers Down Under (my own name for them)) spend about 0.77 dollars to collect 100 dollars. Again, maybe HMRC and the ATO are super-wasteful and the IRS only marginally less so, but, it is my opinion this is not the case.

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