Last week, we pointed to a piece of news that we have yet to read or hear from most major news organizations: The federal budget deficit is going to take a hit, because Congress included the government’s fundraising arm, the Internal Revenue Service, in the sequester.
Put in proper context, meanwhile, that story is a bigger deal than just a sequester tale. Adjusted for inflation and population growth, Congress has cut the IRS budget 17% since 2002, context that no major news organization has reported, as far as I can tell. Such cuts have real impact, as we shall see.
Moreover, news hooks to this are all over the place. Last Thursday, Treasury Secretary Jacob Lew told House members (the Committee On Appropriations Subcommittee On Financial Services And General Government) that the president wants “a $1 billion increase” for the IRS budget, “of which $412 million is to maintain the integrity of tax law enforcement” through “initiatives that provide a high return on investment.” In plain English, that refers to the budget for tax detectives to ferret out cheats.
Hardly anyone picked up on this. Searching in the Nexis major newspapers file and in Factiva since last Thursday and I could not find any coverage in major newspapers or on the three television network evening news programs. Patrick Temple-West of Reuters reported that “the head of the Internal Revenue Service cautioned on Thursday that tax collections will suffer from budget cuts imposed on the agency by Congress.” Dow Jones also ran a brief piece, by Jeffrey Sparshott, which said the furloughs of IRS personnel will result in “poorer service and lower revenue collection.”
Among regional outlets, the Baton Rouge Advocate had a piece keyed to a local congressman’s complaint about how the “IRS is seeking to increase its budget by more than $1 billion to a total of about $13 billion.” (It’s worth noting that the president is seeking the $1.6 billion increase, not the agency.)
What’s missing from everywhere, including these meager offerings, is the Why?—the rationale for increasing the budget of the IRS. That is where the story lies. In fact, the increased spending that President Obama has asked for would reduce a major disparity in how the tax laws are enforced—efficiently and effectively for wage earners, but inefficiently and ineffectively for the self-employed, business owners, landlords, and other non-wage income earners.
The 151 million Americans who have paycheck jobs see their federal income and payroll taxes deducted before they are paid, in a largely automated system that verifies what individuals report on their tax returns with data from employers. Meanwhile, business owners, freelancers, landlords, and some investors all self-report—with little to no verification of income.
The possibility of an audit is one reason to self-report honestly. And, like wage earners, the people that Congress trusts to fully report their income are subject to audits. But Congress has reduced spending on audits, reducing both the number of them and their quality.
That is a subtle favor to non-wage earners who choose to shortchange the government, because their odds of getting caught are small and shrinking. Studies in Minnesota, Denmark and elsewhere have found that while nearly every bit of verified income is reported, but as much as 37 percent of unverified income is not.
IRS audit data, analyzed at The Transactional Records Access Clearinghouse (TRAC),
a respected resource on government staffing, spending, and enforcement, shows a severe drop in audits just since Fiscal 2011. The latest TRAC report on the IRS includes data through the end of January. (Professor Sue Long, a co-founder of TRAC, gets monthly reports from the IRS under a federal court order.)
So what’s the upshot? These IRS cutbacks put a burden on the rest of us, the taxpayers who do pay their fair share. The federal deficit has been shrinking, but it could shrink faster with better tax collection.