NCPA - National Center for Policy Analysis

Uncollected Taxes Rose As IRS Grew

October 1, 1997

Last week, the Senate Finance Committee opened hearings on abuses by the Internal Revenue Service that got headlines throughout the country. The committee heard from both taxpayers and IRS employees, many of whom had to testify in disguise to avoid retaliation from IRS management. In the words of Newsweek, "They told of an IRS that is a virtual police state within a democracy, a Borgia-like fiefdom of tax terror at the heart of the U.S. economy." Republican leaders promised quick action on legislation to reform the IRS before year end.

This is not the first time Congress has promised to get control of the IRS.

Hearings similar to those last week were held in the Finance Committee 10 years ago, garnering similar headlines. During those hearings, an IRS agent from Los Angeles testified of a sign on his manager's door reading, "Seizure Fever--Catch It." A Baltimore agent testified that agents were routinely rewarded for having the best collection statistics. The committee also heard from taxpayers whose lives were allegedly destroyed by IRS excesses. This led to passage of a Taxpayer Bill of Rights in 1988 that supposedly was going solve the problems.

Of course, the legislation did not solve the problems. Nor did a second Taxpayer Bill of Rights in 1996. The reason is simple. For decades congresses and administrations have put unrelenting pressure on the IRS to collect more revenue. And the IRS has always been more than happy to comply; provided, of course, that it was given more money for agents and computers to audit and investigate recalcitrant taxpayers.

At least as far back as 1948, the IRS has been promising Congress an enormous return on new funding for audits. Commissioner Joseph Nunan went so far as to promise the House Appropriations Committee that the Treasury would get $20 for each $1 invested. Although the IRS later backed away from the 20-for-1 figure, every commissioner since nevertheless has promised that substantial additional revenues would be forthcoming if only it had more money.

Even Ronald Reagan was seduced by the IRS's promises. In 1982 he was told that there was $95 billion of revenue going uncollected simply due to lack of resources. "As we struggle to trim government spending, it's hard not to think of how close that unpaid tax could come to wiping out the deficit," Reagan commented. This led him to support almost annual increases in the IRS's staff and budget. The total number of IRS employees rose from 86,156 in 1981 to 114,873 in 1988, a rise of one-third. The IRS budget doubled over this same period from $2.5 billion to over $5 billion.

The IRS budget has continued to rise since then. Yet despite the massive increase in IRS resources over the last 15 years, the amount of money the IRS says it is not collecting has only risen. In 1982, the IRS estimated the "tax gap" for individuals at $51.9 billion. By 1992, the latest year available, it virtually doubled to $95.3 billion.

In reality, it is a pipe-dream to think that the IRS could ever collect more than a fraction of the tax gap through increased auditing and enforcement. To get anywhere close to 100 percent compliance would require such draconian measures that the American people would revolt en masse. Such revolts have been common throughout American history, as documented in Charles Adams' brilliant new book, "Those Dirty Rotten Taxes" (Free Press, forthcoming). The current outcry against IRS abuses is only the latest manifestation.

In the end, the job of the IRS is to keep tax evasion as low as possible without inciting revolt. But ultimately, some tax cheating is a necessary price for maintaining a free society.

Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis), October 1, 1997.


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