There is a relatively simple formula that states that Government Revenue – Government Spending = Surplus if positive, a balanced budget if Neutral, a Deficit if negative. The most recent bi-partisan spending bill is scheduled to increase the deficit by $800 billion over the next decade. Now don’t get me wrong. I think it is great that Congress has passed a bi-partisan bill to fund the government for the rest of FY 2016 through September 30, 2016. I am pleased that the series of stop gap measures will cease for now. I am pleased that Congress has done its duty relative to spending.
The deficit has been steadily decreasing since 2009. According to Government Executive, “Buoyed by increasing revenue from an improving economy and tax increases in 2013, along with spending caps enacted in 2011, the deficit has shrunk by more than half since the early Obama years, to $439 billion in fiscal 2015. And as the gap has declined, so has the urgency on Capitol Hill.”
Congress is celebrating this bi-partisan accomplishment and rightfully so, but let’s pause for a moment. If government spending is going up and revenue is not, that means the deficit is getting worse. If that is a concern, doesn’t that imply if there is an interest in reducing the deficit that the way to do this is to raise taxes? That is the phrase that no one wants to utter, but if we don’t raise taxes aren’t we mortgaging our future on our children and their children? Do we care? I would argue that this is the 600 pound gorilla in the room.
The IRS is the primary revenue arm of the U.S. Government. I would also offer that if we are not interested in raising taxes are we interested in going after tax cheats? According to Accounting Today the IRS will receive a 2.9% percentage increase in its budget having incurred large decreases every year since 2010.
“The Internal Revenue Service would receive $11.23 billion in fiscal year 2016, an increase of $290 million over the current level, specifically for customer service, identity theft and cybersecurity, according to the National Treasury Employees Union. …. that figure is $1.7 billion less than the administration’s request of $12.9 billion, … the final amount is an improvement over the House proposal to cut the IRS budget by almost $838 million compared to the current level.”
The Tax Gap
The tax gap is “The gross tax gap is the difference between true tax liability for a given tax year and the amount that is paid on time. It is comprised of the nonfiling gap, the underreporting gap, and the underpayment (or remittance) gap.” According to the IRS.
The tax gap was estimated to be $355 billion in 2012. I don’t know nor does the IRS know what the estimated tax gap is for 2013, 2014 or 2015 at this point, but with underfunding every year since 2010 it is hard to believe it could have gotten better. Wouldn’t it make sense to try and reduce this before raising taxes?
Ways to Reduce the Tax Gap
A prudent business person might ask if we were to spend another dollar what might the return be on that additional dollar in spending? The government should do that too, don’t you think? A business person would jump at the chance for a 20% return on investment in their firm. Wouldn’t’ you like to have a 20% return on your money? Well let’s look at what the IRS could potentially bring in if additional funding was made to the IRS. In my blog (mikegreg.com/blog) on November 24, 2015. I presented that,
“The higher graded agents that audit individuals might be a GS 12. Taking a GS 12 step 5 (mid-range of steps from 1 to 10) with a salary of $71,736 per year ($32.60 per hour) and comparing that to bringing in $605 per hour for those individuals making between $200,000 and $399,999 for a ratio of 18.5 dollars of return for dollar invested, or bringing in $4,505 per hour for those individuals making over $5 M for a ratio of 138 dollars of return for dollar invested, wouldn’t you think it would be a good idea to hire some more auditors? - See more at: http://www.mikegreg.com/blog/irs-auditing-right-parties#sthash.sUTftaa9.dpuf
That means the return on investment to audit these individuals would be not 20% but 18,500% for individuals making $200,000 to $399,999 and 138,000% for those with incomes over $5 million. Congress is not spending another dime in these areas. My question is if we care about the tax gap, making proper investments to fund the government, shouldn’t we be increasing IRS funding not only to put a finger in the dike to answer some of the 15,000,000 phone calls not answered last year, address some of the issues on domestic cyber thieves, and identity theft, but to also bring down the tax gap and the deficit? Not funding the IRS properly will only make things worse. I realize suggesting more funding for the IRS does not have the same political appeal as addressing our national defense, but this truly is a national defense issue in the long run. Think about it.
About the author
Mike Gregory is a professional speaker, an author, and a mediator. You may contact Mike directly at firstname.lastname@example.org and at (651) 633-5311. Mike has written 12 books (and co-authored two others) including his latest book, The Collaboration Effect: Overcoming Your Conflicts, and The Servant Manager, Business Valuations and the IRS, and Peaceful Resolutions that you may find helpful. [Michael Gregory, ASA, CVA, NSA, MBA, Qualified Mediator with the Minnesota Supreme Court]