Earlier this month, Elizabeth Warren suggested that better funding the IRS and cracking down on tax evasion could raise $2.3 trillion over a decade, money she would then use to fund her health care plan. To many, myself included, that immense number looked a tad optimistic. It’s true that the government currently fails to collect 15 percent of all taxes Americans owe, and closing that gap would bring in trillions. But the Congressional Budget Office had previously projected that the feds would only net about $35 billion over a decade from a big tax enforcement push. Warren’s plan was vastly more ambitious than what the CBO envisioned, but her revenue estimate was also 65 times higher.
This week gives us another ballpark estimate, courtesy of former Treasury Secretary Larry Summers and University of Pennsylvania law professor Natasha Sarin, who have been two of Warren’s fiercest critics on tax policy. Their attacks have generally focused on the candidate’s proposal for a wealth tax, which they argue would raise far less revenue than she has forecast. But their new paper, released through the National Bureau of Economic Research, somewhat unexpectedly gives Warren’s basic idea a bit of validation: Summers and Sarin find that beefing up the IRS and adding new tax reporting requirements could plausibly bring in about $1 trillion over 10 years.
On the one hand, that’s less than half the amount the candidate promised. On the other, it’s still 13-figures worth of revenue just waiting to be collected, the closest thing you’ll find in Washington to free money. As Summers and Sarin put it, there’s “substantial low-hanging fruit to be gathered.” And they offer a three-part plan to pick it.
Step 1 is to simply give the IRS more money to properly do its job. The agency’s overall budget is down 15 percent since 2011, and its enforcement budget is down by even more. Predictably, the agency’s efforts to police tax cheats have withered: The share of returns audited has fallen by 45 percent. “The resources the IRS has to tackle non-compliance are at historic lows,” Summers and Sarin write, and as a result, it’s increasingly incapable of auditing wealthy filers. Last year, just 3.2 percent of taxpayers earning more than $1 million faced an audit, down from 12.5 percent in 2011. Summers and Sarin would boost the IRS’s budget and dramatically ramp up audits on the rich, which they believe could raise hundreds of billions of dollars over a decade.
Step 2 is to make it harder for Americans to hide their income, by creating stricter third-party reporting requirements. In general, people are less likely to cheat on their taxes when they know that somebody else, like an employer or bank, is also going to send the IRS information about what they earn, since there’s a strong chance they’ll get caught. So, more reporting equals less dodging.
Step 3 is to revamp the IRS’s ancient digital infrastructure, so it can use more advanced analytics to catch tax cheats. Taxes are boring. IT is boring. But together, they can help haul in an exciting amount of cash.
In the end, it’s impossible to say for certain how much money the government can raise by rebuilding the IRS. Maybe Summers and Sarin are right about what’s realistic. Maybe Warren, whose plan includes additional steps aimed at combating international tax dodging, is. But the precise numbers, in this case, are much less important than the fact that someone like Summers, the human embodiment of Washington’s moderate-Democrat establishment, and Warren, one of the party’s left-wing standard-bearers, can agree that simply giving the IRS the tools it needs could produce a massive budget windfall capable of funding some major new initiatives. It’s a policy no-brainer.
But there’s a catch: If Democrats want to pay for new spending by fixing the IRS, they’ll probably need to change how budget scoring works on Capitol Hill. Right now, as Summers and Sarin point out, Congressional Budget Office rules prevent it from counting new revenue from improved tax enforcement when it’s estimating the cost of a bill. So even if spending $100 billion to turn the IRS into a lean, efficient, billionaire-auditing machine brings in $1.1 trillion in extra collections, the CBO will just report that the bill costs the government $100 billion. To put it another way, funding the IRS pays for itself and then some in practice, but not on paper. That’s a problem, since Congress generally relies on scores from the CBO and Joint Tax Committee to determine whether a bill can pass.
The CBO’s guidelines were put in place in order to prevent Congress from relying on budget gimmicks in their bills. But now that the IRS is starved for resources, and restoring its funding would bring in significant new revenue, those guidelines are clearly outdated. The good news is that even center-left Democrats like Sarin and Summers concur with Warren that there’s a huge opportunity for the government to raise money without raising taxes. The bad news is that Democrats will have to tweak the rules to take advantage of it (while ignoring the objections from Republicans who will inevitably oppose any such changes). Still, that, too, should be a no-brainer.