Another Biden Pay-For Comes up Short | National Review

Another Biden Pay-For Comes up Short | National Review

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The Congressional Budget Office (CBO) today published its revenue estimate for President Biden’s proposed increase in IRS funding to close the tax gap, which is the difference in the amount taxpayers owe compared with what the IRS actually collects. The CBO estimates that an $80 billion increase in IRS funding would raise an extra $200 billion over the next ten years, so it would increase revenue by $120 billion on net.

That’s nowhere near what Democrats wanted. Back in May, the Treasury Department said $80 billion in extra IRS budget would raise $700 billion over the next ten years. Some Democratic members of Congress were hoping for $1 trillion in extra revenue from better enforcement, the Washington Post reported in July.

This is not the first time the Biden administration’s pay-fors have come up short. The CBO also poured cold water on their rosy projections for the bipartisan infrastructure bill.

There are parts of Democrats’ enforcement plans that the CBO did not score related to reporting requirements, but including those changes still wouldn’t get anywhere near $700 billion or $1 trillion in extra revenue over ten years.

An extra $80 billion would be a massive increase in the IRS’s budget. The CBO describes Biden’s plan as follows:

Spending would increase in each year between 2021 and 2031, though the highest growth would occur in the first few years. By 2031, CBO projects, the proposal would make the IRS’s budget more than 90 percent larger than it is in CBO’s July 2021 baseline projections and would more than double the IRS’s staffing. Of the $80 billion, CBO estimates, about $60 billion would be for enforcement and related operations support.

In other words, roughly doubling the size of the IRS would raise, on average, $12 billion per year for the next ten years. To put that in perspective, the federal government regularly spends more than $12 billion in a single day.

Last summer, the CBO estimated that a $40 billion increase in IRS funding would net $63 billion in extra revenue. Using that methodology, $80 billion (2 x 40 billion) in extra funding would have netted much less than $126 billion (2 x 63 billion) in extra revenue because there are diminishing marginal returns to extra funding. This time around, the CBO used a more generous methodology than before. The CBO rightly understands the issue as a competitive process:

First, CBO expects the IRS to prioritize the enforcement activities that it thinks will have the highest average return; additional enforcement spending would therefore have lower returns than previous spending. Second, CBO expects taxpayers to adapt to the IRS’s enforcement activities and adopt new ways of evading detection, so an enforcement activity may have a lower return in later years.

That’s the same understanding they had last summer. The difference this time is they believe the IRS would have a higher rate of return on enforcement activities than in their previous estimate. They also incorporate the effects of better technology making tax enforcement easier, which last summer’s estimate did not do. Even with that more generous methodology, they could still only find a $120 billion net revenue increase.

The CBO also points to the dilemma Democrats face on the tax-gap issue: If you successfully close the tax gap, there’s no tax gap left to exploit for revenue. “An increase in the IRS’s funding could signal that the agency was more capable of detecting noncompliance, thus increasing voluntary compliance and revenues,” the CBO says. “However, if there were fewer noncompliant taxpayers to audit, the [return on investment] from the IRS’s enforcement activities would drop, and the direct revenues from increased enforcement would be lower than CBO estimated.”

As I wrote in July, if the tax gap were the revenue jackpot that Democrats want it to be, politicians would have exploited it already. The fact that nobody has yet indicates it actually wouldn’t raise much money. For the second year in a row, the CBO has confirmed that intuition.

Dominic Pino is a William F. Buckley Fellow in Political Journalism at National Review Institute.

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About the Author

Tony Beasley
Tony Beasley writes for the Local News, US and the World Section of ANH.