It’s not crazy for the new Republican House speaker, Mike Johnson, to insist that $14 billion in new aid for Israel be offset by cuts elsewhere in the government’s $6 trillion budget. The Congressional Budget Office (CBO) lists dozens of options for cutting federal spending or boosting revenue.
Johnson didn’t choose any of those. Instead, he mustered a bill, which the House passed with mostly Republican votes, to cut funding for the Internal Revenue Service (IRS) by the same $14.3 billion in aid the bill would provide to Israel.
It’s a cynical and self-defeating idea. Cutting the IRS budget doesn’t save money. It costs money, because with fewer resources the tax agency will have a harder time catching wealthy tax cheats who don’t pay what they owe. The CBO analyzed Johnson’s Israel bill and found cutting the IRS budget by $14.3 billion would reduce federal revenues by $26.8 billion, for a net cost to taxpayers of $12.5 billion. So Johnson wants to “pay for” $14.3 billion in aid for Israel with a gimmick that would nearly double the cost of the actual aid Israel gets.
The House bill has no chance of passing the Senate, which Democrats control. Democrats added funding for the IRS last year and they’re not about to renege on that. Even some Senate Republicans object to the House bill because it doesn’t include additional aid for Ukraine and Taiwan, which bipartisan majorities in both chambers support. So the House bill is nothing more than a symbolic statement of spinelessness by the Republicans who voted for it.
But it’s worth examining the Republican endorsement of tax cheating, because it’s a zombie policy that’s brain-dead and ought to die, but won’t. For more than a decade leading up to 2022, the tax-cheat lobby persuaded Republicans to cut funding for the IRS, which robbed the agency of computer upgrades, specialists, and other resources needed to chase tax evaders employing top-shelf lawyers and accountants to hide their money. From 2010 to 2022, IRS audit rates plunged 64% for the wealthiest Americans and 50% for the biggest corporations.
Ordinary people who earn their income from labor reported on a typical paystub can’t cheat on their taxes, by and large. When your employer reports your income to the government, there’s really no argument about what your income tax should be or how much you owe. Sure, people can try claiming bogus deductions, but still, there’s relatively little tax cheating among people whose employers deduct their taxes for them.
Most of the tax evasion happens among people who pull down large amounts of investment income from ownership in a business or other assets. This is where tax accounting gets creative, because much of that income isn’t reported to the government through an employer, and taxes aren’t automatically withheld. So these filers have more opportunities to underreport their income, to claim lavish deductions or to even avoid filing their taxes at all.
This so-called tax gap — the amount that people owe the US government but don’t pay — could range from $280 billion per year to a whopping $1 trillion. At the upper end, that amount would fund the entire Defense Department with more than $100 billion left over.
The IRS will never be able to collect every single dollar US taxpayers owe. But it could certainly collect a lot more if it had modern tech instead of computer systems dating to the 1960s and top talent able to go toe to toe with the tax sharks on the payrolls of billionaires. So last year, when Democrats controlled both houses of Congress, they provided $80 billon in additional funding for the IRS over a decade. That’s roughly a 60% increase over the agency’s 2022 budget.
The CBO estimated that the additional funding would help the IRS pull in about $180 billion in additional tax revenue during that time period, mainly through stronger enforcement. On net, that would amount to $100 billion in revenue above costs, the amount by which the overall measure would reduce deficits.
That $180 billion in new revenue is business or personal income tax that people owe, but don’t want to pay. Since Republicans don’t think wealthy Americans should pay what they owe, they started trying to kill the new IRS funding right away — and won a small victory earlier this year. The June deal that ended the debt-ceiling standoff included a cut of $1.4 billion in IRS funding. As usual, the CBO found that the government would lose more revenue than it saved, because tax cheats would get to keep more of the money they owe to the government.
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The latest tax cheating scheme Johnson pushed through the House won’t fly, but expect Republicans to keep coming back to the issue. Another GOP scam is the the claim that the IRS will use its new resources to field a tax army chasing small-timey workers for a few dollars while the big fish get away. If Democrats who voted to beef up the IRS are really dumb enough to let that happen, then they deserve to lose to the tax-cheat-industrial-complex.
Rational people can have a productive argument about the right level of taxation in America. Too much taxation can strangle growth while too little can leave societal needs unmet. We should also have vigorous debate about who should bear what portion of the tax burden and what to tax in the first place, whether it’s income, wealth, consumption, or something else.
But once you have a tax code, as we do in the United States, it’s nihilistic to deliberately undercut enforcement. If you think the correct level of taxation is zero, then you’re arguing not for a government but for anarchy. And if you think the tax code should only be enforced against those least able to abuse it, you’re writing a prescription for a banana republic.
Johnson and the tax-cheat caucus backing him want to boost deficits and undermine faith in the tax system at a time when decades of abuse of the nation’s finances are finally starting to hurt ordinary Americans. The national debt is now a monstrous $33 trillion and financial markets are signaling they can’t absorb all the new debt Washington is flooding on the market. So interest rates are rising on mortgages, car loans, and everything else consumers finance. Somebody in Washington needs to start taking this seriously. Apparently it won’t be Republicans.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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Jessica Roberts is a seasoned business writer who deciphers the intricacies of the corporate world. With a focus on finance and entrepreneurship, she provides readers with valuable insights into market trends, startup innovations, and economic developments.
