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Dominic Pino: Janet Yellen’s Bogus IRS Math

The Treasury secretary’s numbers from a letter to the IRS commissioner simply don’t add up.Treasury secretary Janet Yellen sent a letter to the IRS commissioner earlier this week about the new funding the tax-collection agency will receive under the Democrats' reconciliation bill. But her numbers don't seem to add up when she talks about the goal of using that windfall to squeeze high-income households.

Yellen writes that the bill includes much-needed funding for the IRS to improve taxpayer service, modernize outdated technological infrastructure, and increase equity in the tax system by enforcing the tax laws against those high-earners, large corporations, and complex partnerships who today do not pay what they owe.

She relates the purposes of funding in reverse order to their amounts. Of the approximately $80 billion in new funding over the next ten years, only $3.2 billion will be for taxpayer services, and only $4.8 billion will be for modernizing technology. Tax enforcement will get $45.6 billion, and general operations will get $25.3 billion. It's an expand-the-IRS bill, not a modernize-and-improve-the-IRS bill.

Yellen reiterates throughout the letter that audit rates will not increase for households making less than $400,000. She writes:

Instead, enforcement resources will focus on high-end noncompliance. There, sustained, multi-year funding is so critical to the agency's ability to make the investments needed to pursue a robust attack on the tax gap by targeting crucial challenges, like large corporations, high-net-worth individuals and complex pass-throughs, where today the IRS has resources to initiate just 7,500 audits annually out of more than 4 million received.

Let's assume Yellen's numbers are correct. If the IRS workforce today has the ability to do only 7,500 audits out of the 4 million high-income returns, twice as much IRS workforce would be able to do 15,000 out of 4 million. That's an increase from 0.1875 percent to 0.375 percent. Even if we assume growth will be nonlinear due to economies of scale and that the new workers could each do twice as many audits as the old ones, that's still only 22,500 audits out of 4 million returns. So the IRS is going to use $80 billion of funding to increase the audit rate on a relatively small number of high-income returns from 0.1875 percent to, at most, 0.5625 percent?

Perhaps we've gotten too used to speaking in trillions the past few years, but even for the federal government, $80 billion is a lot of money. At 2023 budget levels, $80 billion would fund the entire Department of State for over a year, the entire Department of Justice for over two years, or the entire Department of the Interior for almost 4.5 years. The IRS funding is over ten years, but it's just one agency, not an entire federal department, and we won't be getting diplomacy or national parks out of this spending.

Yellen writes that an additional hour auditing someone making more than $5 million annually generates an estimated $4,500 of additional taxes collected. Again, let's assume that her numbers are correct.

According to the IRS, there were 55,614 income-tax returns with more than $5 million in adjusted gross income in tax year 2019, the most recent data available. With 87,000 new employees, which is roughly what the Treasury estimates the new funding will enable the IRS to hire, each return over $5 million could theoretically get its own personal IRS employee and there'd still be 31,386 new employees left over. And that's not even counting the 94,000 employees who already work for the IRS.

Similarly, one additional hour on each return over $5 million would be 55,614 hours of additional work. Assuming a 40-hour work week, with a week off for Christmas and a week off for Easter, 87,000 new employees is equivalent to 174 million new worker hours per year. That won't show up all at once, of course, since it will take a few years to hire that many people, and it's likely a good chunk of the new hires will not actually be IRS agents but other personnel. Still, these numbers are orders of magnitude off from the amount of work actually needed to audit people making over $5 million.

On the revenue side, an additional $4,500 from each return with income over $5 million comes out to about $250 million. Even if the IRS spent an additional ten hours on each return, and got $4,500 each time (which it wouldn't because of diminishing marginal returns, but let's be generous), that's only $2.5 billion. Democrats are banking on IRS enforcement raising $203 billion in new revenue. Where's the rest of that money coming from?

If Democrats truly want to increase tax enforcement only on a tiny sliver of the highest-earning citizens, they did not need $80 billion and 87,000 new IRS employees to do it. At best, if they keep their word, there will be a whole lot of fresh IRS employees with not a lot of work to do.

Dominic Pino is the Thomas L. Rhodes Fellow at National Review Institute.

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Posted: August 12, 2022 Friday 06:30 AM