Economist Says IRS Really Needs More Enforcement Power
The best listening experience is on Chrome, Firefox, or Safari. Subscribe to Federal Drive’s daily audio interviews on Apple Podcasts or PodcastOne.
Maybe we can’t quite do the math. But somehow everyone realizes that runaway government deficits will somehow harm the American dream. This is one of the reasons, according to my next guest, that the IRS should get more money for the tools and the application people. William Gale is an economist, tax expert and senior fellow at the Brookings Institution and has joined Federal Drive with Tom Temin for more discussion.
Tom Temin: Mr. Gale, nice to have you.
William Gale: Thanks happy to be here.
Tom Temin: And if increased enforcement will produce more revenue, as the president has proposed, and as others have proposed before him, I guess my first question is, could we also simplify the tax code before that and maybe reduce some expenses?
William Gale: Well, there are problems that can be solved, and there are some that cannot be solved, I think simplifying the tax code is practically unsolvable. I have written a lot about it. It’s very clear how we do it. But it’s equally clear that no one really has an interest in doing it. And that’s a subject in itself. When I say nobody, I mean nobody on the Hill. In the meantime, there are fruits at hand related to tax evasion. There are hundreds of billions of dollars a year that goes unrecognized. And you know, if politics is the art of the possible, we should be focusing on the issues we can fix with the breakout at the top of this list right now.
Tom Temin: And so what kinds of resources do you think the IRS needs because besides having more people, they need to have ways of knowing where the escape is taking place in the first place.
William Gale: There are actually three issues: the first is IRS staff in general and audit staff in particular, which has been drastically reduced over the past two decades. The second is computer technology, the IRS uses computer languages that belong to a museum. And third, we need more audits, more attention, more reporting of information to help the IRS detect situations where people are evading tax.
Tom Temin: And of course, tax evasion is a crime unlike tax avoidance, which is everyone’s smart strategy. And could the increased enforcement and evasion search by the IRS also come with the complexity of the tax code and the ease with which it is possible to make an honest mistake? Maybe less on the punitive side, if someone agrees and everyone agrees that a mistake was made resulting in a breakout, but maybe not with the intention of escaping.
William Gale: It’s correct. There is the difference between the avoidance which everyone does, and it is perfectly legal, and the evasion, which is a crime and which consists in deliberately not paying the taxes that one owes or not. deliberately declare the income you have. So the IRS, if it has the capacity to increase audits, it will get money through audits and increased attention. But most people think we’ll get even more money through increased voluntary compliance. What we call voluntary should it be in the air quotes. But this will cause people to declare income that they would not otherwise have declared and therefore to pay taxes on that income. So there is plenty of room to reduce the escape rate,
Tom Temin: and what kind of tools or data sharing would be needed because all of this has – any income someone gets really has evidence and an electronic trail, unless it’s paid in cash.
William Gale: Law. The main ingredient here is information communication. If people think about their work, their employer withholds taxes from their wages, sends them to the government. At the end of the year, the employer sends a statement to the government and the worker on the amount of taxes withheld. And obviously, the evasion rate with restraint and third party reporting is extremely low. The evasion rate on wages is less than 1%, according to the IRS. On the other hand, there are many situations where there is no withholding and there is no third party declaration. And the most obvious situations here are like partnerships, sole proprietorships, or farms. In all of these cases, the underreporting of income is enormous; in sole proprietorships and farms, that’s more than half of the income that goes unreported to the IRS. And that’s obviously a problem. Some of these mistakes can be honest mistakes. Some of these things can be practical or even illegal. So it seems very important to get to the bottom of this. In contrast, there has been a lot of attention in recent years on the beneficiaries of the EITC – the low income grants, and it was essentially a political ploy. The evasion rate is not very high there and when it is, it is usually a situation where the wrong parent gets the deduction for the child, rather than someone who is trying outright to cheat the tax system.
Tom Temin: We speak with William Gale. He is a senior researcher in economic studies and co-director of the Tax Policy Center at the Brookings Institution. And over the years, as you pointed out, the IRS has had limited budgets. They suffered budget cuts from both administrations and from both parties in Congress, but they did not have zero resources. And then knowing what, say, in limited partnerships or farms and so on that the escape rate is so high, which made it difficult for them to focus – they can find 100 people from somewhere to focus on these particular problems.
William Gale: Partly has been limits on resources. Again, they are checking and the staff has gone down in part. It is difficult for them to keep abreast of the latest advanced escape techniques in the private sector. Part of it was just some kind of PR thing. They want to be careful not to go too far. I mean, let’s say they do, you know, 1,000 audits and 50 of them are not far enough, and 50 of them are too far, you’re going to hear in the media talking about the 50 that are too far. They are therefore very sensitive not to exceed their limits.
Tom Temin: And because you mentioned it too, there isn’t a lot of political will or no political will to simplify the tax code. I remember when George HW Bush was running against Michael Dukakis. And Dukakis proposed, the very thing we’re hearing about now is increasing the IRS enforcement staff and so on. George HW Bush just said, “Well, I’m not going to send a whole swarm of people to harass everyone in the United States. So I wonder how politically realistic it would be for the IRS to get these types of funds and resources that the president is proposing?
William Gale: Well, the bill that just came out of Ways and Means has a substantial increase for IRS funding. It is important that the increase is not only large, but that it is sustained. Because you can’t build a new system, you can’t build a new computer system, you can’t train new people over time if you don’t have sustained funding. Yet one time will not be enough. And the fact that the bill talks about sustained funding is really important to its success.
Tom Temin: And sustained funding sometimes puts spending programs out of the apparent control of Congress or an administration and that can then raise constitutional issues, I guess.
William Gale: Yes, Congress can always override anything Congress does. So it’s similar to an investment, let’s say an infrastructure – you don’t want to build half the bridge and then stop the funding. Likewise, you don’t want to pay the IRS to install a new computer system and then withhold funding that would allow them to learn how to use the new computer system.
Tom Temin: Okay, let’s get back to some specifics, where exactly do you see what the IRS needs in terms of people, resources, money, and systems? Just to summarize?
William Gale: The short answer is everything, but the two things I would focus on are checking staff and checking information. Well, three things: audit staff, information provided by financial institutions so that they can better track financial flows and IT technology.
Tom Temin: William Gale is Senior Research Fellow in Economic Studies and Co-Director of the Tax Policy Center at the Brookings Institution. Thank you very much for joining me.
William Gale: Thank you for inviting me and talking about these important issues.