The Republican-led Congress's cuts to the IRS budget have significant implications for the US economy.
Donald Trump’s election with Republican House and Senate majorities has put the Internal Revenue Service back in the spotlight. The agency lost $20 billion in funding under the latest deal to avoid a government shutdown, and further cuts to its enforcement budget are likely in the next Congress. Democrats denounce such moves as harmful to federal revenues and tax fairness; Republicans cheer them for limiting government.
Unfortunately, neither side tends to point out that an adequately funded IRS is good for the U.S. economy. Years of IRS underfunding have led to a massive unpaid tax bill, around half a trillion dollars a year. Beyond lowering revenues, the sheer magnitude of this tax evasion has implications across the economy, providing competitive advantages to those able and willing to avoid their tax obligations. Less enforcement funding will only worsen this problem. The hundreds of billions of dollars in taxes that haven’t been paid are not spread evenly across taxpayers. They’re disproportionately owed by businesses with the greatest incentive and ability to shirk their tax burdens. These include self-employed entrepreneurs, businesses that deal in cash and large, private companies with complex operations. Companies that have less opportunities to evade taxes, and workers who are paid directly by an employer, are more likely to pay their taxes. The unpaid taxes therefore work as a substantial subsidy for the businesses and taxpayers who evade them. In economic terms, lower taxes boost returns on investment for the businesses that avoid their obligations but not for others. That in turn distorts the way businesses operate in three primary ways. First, the tax gap pushes more economic activity toward industries and occupations with opaque sources of income — such as construction businesses that deal mainly in cas
ECONOMY TAXES IRS UNDERFUNDING TAX EVASION
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