Morgan Housel writes that enforcing current tax law would bring the budget into balance practically as much as any of the competing deficit reduction plans put forward:
Tax evasion added $3 trillion to the deficit over the past decade alone, an average of $300 billion a year, according to IRS data. This isn’t revenue lost from legal tax write-offs, like the mortgage interest deduction. It’s not even, as the IRS notes, “taxes that should have been paid on income from the illegal sector of the economy.” That $300 billion represents the amount of revenue lost from people deliberately cheating on their taxes every year. This includes underreporting income, hidden offshore bank accounts, sham trusts, and other ways to illegally stiff the IRS [...]
Now extrapolate last decade’s tax fraud into the next, and adjust it for inflation and economic growth. We’re probably looking at $4 trillion in tax fraud over the next 10 years.
And there it is. Without raising tax rates or reducing spending, we could eliminate more than half of our projected deficit over the next 10 years by simply eliminating tax cheats.
You can update this with a Government Accountability Office study showing that, in fiscal year 2010, $330 billion in taxes were uncollected. So adjusting for inflation as the years go by, the $4 trillion number looks about right.
Let’s put this another way. The CBO and other analysts estimate that allowing the Bush tax cuts to expire would add $4 trillion to revenue over the next 10 years. That’s roughly in line with the amount of money you could gain simply by ending all tax evasion.
But of these two solutions, only one is actually credible. Because you’re not likely to stop all tax evasion. That’s especially true when you take into account the fact that the budget deal this month cut funding for the IRS, and added no new agents whose job it is to root out tax evasion. It doesn’t matter that every dollar spent on IRS enforcement brings back up to $10 in revenue, we’re in austerity mode, and the last thing the party in control of the House of Representatives want is for people to actually pay their taxes. I’m all for reducing tax evasion, but I don’t see how we get from point A to point B right now.
So, that brings us back to the second option, which is letting the Bush tax cuts expire. And in essence, what you would be doing is bringing the level of revenue up to where it would be right now without all the deceit and cheating by the citizenry. If everyone paid the taxes they owed, maybe this wouldn’t be necessary. But as it is, we have a culture of cheating, and so the rates need to go back to where they were in the prosperous Clinton era. But you wouldn’t actually be collecting any more revenue, theoretically, than you should have been collecting all along in the Bush era.
Housel was bringing this up intentionally as a theory, and I agree that any serious deficit reduction plan should include an increase to the IRS budget. But there’s a way to get to this level of revenue without hoping that every tax cheat gets caught, and it’s pretty simple: let the Bush tax cuts expire.