Shrinking the Tax Gap: Approaches and Revenue Potential by Natasha Sarin and Lawrence H. Summers published by NBER (11/2019).
“The IRS recently released its most recent estimates on the tax gap—the difference between what was due to the IRS and what it collected. Between 2011 and 2013, the IRS estimates that it failed to collect over $380 billion in taxes per year, across all tax categories.
Extrapolating this estimate to present to allow for inflation and income growth, in 2020 the IRS will fail to collect over $630 billion, or nearly 15 percent of total tax liabilities and that the tax gap will total $7.5 trillion over the 2020 to 2029 period. The sheer magnitude of the tax gap suggests that there is substantial revenue-raising potential from shrinking it through welltargeted enforcement measures.
It is not possible to calculate with precision how much of this missing $7.5 trillion could be collected. Our estimates suggest that it is reasonable to anticipate that with feasible changes in policy, the IRS could aspire to shrink the tax gap by around 15 percent. This would require increased investment in compliance efforts, in the range of previous IRS budget outlays. On the assumption of immediate implementation, our estimates suggest it would be possible to generate around $1.1 trillion in additional revenue in a decade.
This short article represents an attempt to quantify the benefits of substantial investment in tax compliance. We proceed in three parts. We first provide background on the tax gap, noting that the benefits of noncompliance accrue most to high-income earners; and that the resources the IRS has at its disposal to tackle noncompliance are at historic lows. This suggests that there is substantial low-hanging fruit to be gathered from adequate investment in the IRS, and that investments in reducing noncompliance are likely to be progressive. We then argue that more resources for examinations (particularly of high-income earners); an increase in cross-party reporting requirements; and an overhaul of outdated IRS technology will enable the IRS to shrink the tax gap by around 15 percent in the next decade. These estimates seem substantially optimistic relative to what the CBO estimates an increase in IRS appropriations would raise; however, we show the two can be reconciled. Further, we point out that agency scorekeeping guidelines disincentivize compliance investment by limiting the extent to which the gains from additional tax collections can be included in official scores of enforcement initiatives. We conclude by noting that our estimation is naïve and that more formal revenue estimates are desirable. However, we find it probably that scorekeepers will come to the same basic conclusion: restoring the IRS’ budget to previous levels is likely to pay for itself many times over…”
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