Debt-Limit Deal’s Provision to Let Tax Cheats Off the Hook Will Increase the Deficit

The House just approved the deal struck by President Biden and House Speaker McCarthy to suspend the nation’s debt limit through 2025 in exchange for a range of cuts sought by Congressional Republicans. While the deal is not as draconian as the debt bill that passed the House earlier this spring, it includes no new revenues even though tax cuts of the past few decades have been the primary driver of deficit growth. And one provision of the deal – to claw back important funding to crack down on wealthy tax cheats – would actually increase the deficit while continuing the rig the system in favor of the most well-off.

The deal contains a $21.4 billion cut to IRS funding for tax enforcement. This includes an immediate $1.4 billion cut, and a side deal to cut, over the next two years, a quarter of the $80 billion in new funding the IRS received last year as part of the Inflation Reduction Act.

This new funding – particularly the part for tax enforcement, which is the prime target of House Republicans – is critical to allowing the IRS to do one of its most important jobs: crack down on tax cheating by the extremely wealthy and by big corporations. The IRS has had a hard time doing this lately because its enforcement budget was cut by about a fourth between 2010 and 2021. This led to 40 percent fewer revenue agents – the auditors uniquely qualified to examine the returns of high-income individuals and corporations. The number of revenue agents is the lowest it’s been since 1953.

At the same time, rich business owners have exploited the IRS’ lack of resources by aggressively creating enormously complex “pass-through” business structures with hundreds or even thousands of sub-businesses, shell companies, and trust accounts. Dissecting these structures takes resources that the IRS has been denied. The number of partnerships with assets above $5 million – just one type of pass-through business structure – grew by 75 percent between 2010 and 2020. And by the end of the decade, the audit rate of these businesses was less than half a percent.

As a result, the gap between taxes owed and paid keeps growing, driven largely by the inscrutable labyrinth of business entities that well-paid accountants and attorneys can create for their clients. The most recent estimated gross tax gap, for 2014 through 2016, was $496 billion.

The White House says the cuts in the proposed deal shouldn’t change the agency’s plans for the next few years, since the original $80 billion was to be spent over a 10-year period. At best, however, that leaves the agency short of funds in the future. If you’ve worked around budgets for long enough you know a simple truth: a cut is a cut. And this is, indeed, a cut of significant proportions.

Ironically, for Republican leaders who have spent months clamoring about the deficit, these cuts to the IRS will increase the deficit by reducing the revenue the agency is able to collect from those who owe. (Perhaps it’s less ironic and more on-brand, given that these same Republican leaders want to quickly pivot to pushing through more big tax cuts that will disproportionately reward wealthy families and corporations.)

The IRS cuts will increase the deficit by $19 billion over the next decade because it will depress revenue collections by $40.4 billion, according to Congressional Budget Office estimates provided to Senate Budget Committee Chairman Sheldon Whitehouse.

Could this debt deal have been worse for tax enforcement? Absolutely, given that House Republicans’ first legislative move of this Congress was to repeal a much bigger chunk of the new IRS funding. But that doesn’t change the fact that cutting these critical funds to enforce our tax laws erodes the fairness and integrity of our entire tax system while reducing the revenue lawmakers have available to invest in the American people.

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