Committee for a Responsible Federal Budget

The Case for Tax Reform: Reducing the IRS's Administrative Burden and the Tax Gap

Jan 12, 2012 | Taxes

The Internal Revenue Service report on the 2006 tax gap, showing $385 billion (about 15 percent) of missing revenue, has made its rounds, sparking debate about the IRS budget. Just yesterday, National Taxpayer Advocate Nina Olson weighed in, saying that the IRS was over-burdened and under-funded for the job it was trying to do.

We know, for example, from the Senate version of the Budget Control Act that an increased IRS enforcement budget can reduce the deficit (the Senate's BCA provided $13.6 billion for enforcement, with an estimated revenue return of $43.6 billion). However, Congress may find it difficult to keep the IRS's budget at a high level with the discretionary spending caps in place. Still, they haven't been doing the IRS any favors otherwise, significantly adding to the complexity of the tax code by using it as a substitute for direct spending programs. Just look at the current $1.1 trillion of tax expenditures, whose number and size have only been growing since the most recent tax gap estimate in 2006.

Tax Gap Numbers (billions)
 Tax Year 2001Tax Year 2006
Total Tax Liability$2,112$2,660
Gross Tax Gap$345$450
Enforcement and Late Payments$55$65
Net Tax Gap$290$385

An increased budget is one way to tackle the tax gap, but another way is to simplify the tax code. Undertaking comprehensive tax reform would drastically reduce the size and number of tax expenditures and it would reduce errors (since it would be easier for people to figure out their tax liability), both of which would likely have the effect of reducing the tax gap. Also, by only having a few tax expenditures to administer--many other complex rules and carveouts having been eliminated--the IRS wouldn't need nearly as many resources as it would to adequately enforce the current system. Not only would tax reform reduce the tax gap, but it would also free up money that would otherwise go to the IRS budget for other spending programs.

A simpler tax code is certainly an improvement over the current system at any time, all else being equal. But, on the margins, it may be especially fitting for a time of strictly limited resources, when spending money to enforce an extremely complicated tax code takes away from other priorities.