One of the things I try to check on periodically is the amount of the tax gap (TG). The TG is the amount of taxes owed to the federal government that are not paid. I use the TG as an indicator of (1) the level of corruption in society, and (2) the degree of dysfunction in congress.
A few years ago, I estimated the TG at about $1.3 trillion per year, but official IRS estimates were always lower by several hundred billon. I attributed the difference to IRS fear of Republicans in congress who hate the IRS. They want to shrink it a lot. A few want to get rid of it entirely, seeing taxes as theft, unconstitutional, or whatever other excuse they can dream up. Reporting a lower TG helps the IRS avoid the mindless wrath of Repubs.
An Oct. 2024 post by the Committee for a Responsible Federal Budget reported the IRS TG estimate for 2022:
The Internal Revenue Service (IRS) recently published its projections of the “tax gap” – the difference between taxes owed to and collected by the federal government annually – for tax year 2022, as well as updated projections for tax years 2017-2019, 2020, and 2021. The report finds that the net tax gap after enforcement actions fell from $617 billion in 2021 to $606 billion in 2022.While the IRS projects that taxpayers owed $4.6 trillion in total tax liability in 2022, only about $3.9 trillion of that was paid on time and without penalty. Enforcement actions and late payments led to an additional $90 billion being collected.
A large portion of the tax gap comes from income subject to little or no information reporting requirements, such as business income from sole proprietorships. Of the $381 billion projected individual income tax underreporting gap in 2022, $179 billion – or 47 percent – comes from this category, including $117 billion from “non-farm proprietor income.” Other forms of income that are subject to more reporting requirements contribute much less to the tax gap.
What congressional Republicans really hate and actively work to eliminate is IRS enforcement actions. They do that by cutting as much funding for IRS enforcement as they possibly can. Each dollar the IRS spends in enforcement actions is estimated by the IRS to return about $5-7, a 500-700% ROI. For example, in FY 2023, the IRS collected $86 billion through enforcement programs, which equates to an ROI of about $7 to $1 compared to the IRS's discretionary budget. In FY 2022, the IRS collected $72.4 billion through enforcement programs, yielding an ROI of about $6 to $1 or 600%. The Congressional Budget Office has historically estimated that an additional dollar of enforcement spending would yield between $5 and $9 in additional revenue, focusing on the highest-return activities.
See how useful the TG is in evaluating corruption and government dysfunction? What a fun little tool.
I expect that once DJT is settled in and gets his Project 2025 wrecking ball running full tilt 24/7/365, inconvenient data like this about the TG will suddenly either disappear entirely or the estimates will drastically decrease to the point of making the TG a non-issue. Ways to make the TG decrease is to legalize tax cheating, e.g., by creating more loopholes, or to reduce taxes. The GOP is diligently working both angles.
Savor the data while it lasts. Its days are probably coming to an end fairly soon. We will soon be engulfed in massive thick clouds of opacity about inconvenient government operations and corruption.
