In 1982, a year after shepherding President Ronald Reagan’s tax cut — the biggest ever — through the U.S. Senate, Republican Bob Dole decided something had to be done about the resulting increase in the federal deficit. That something was the Tax Equity and Fiscal Responsibility Act of 1982, which closed income-tax loopholes and increased excise taxes on cigarettes and phone service. It also provided billions of dollars in new funding for “improved enforcement” by the Internal Revenue Service.
“As chairman of the Senate Finance Committee, my obligation is to make certain that everybody pays the tax they owe before we go back and ask people to pay more tax,” Dole explained at the time. Give the IRS enough resources, and you could collect more taxes without increasing the burden on law-abiding taxpayers. This philosophy was to hold sway for the rest of the Reagan years, with the number of IRS employees increasing 39 percent from 1982 to 1988.
The slide in IRS staffing that followed in the 1990s was partly the result of technological progress, but continued employment declines after that began to cut sharply into the agency’s enforcement capabilities. The share of high-income tax returns that were audited collapsed in the 2010s and the number of audits of such taxpayers fell another 77 percent from 2010 to 2021.
With the U.S. facing even bigger deficits as a share of gross domestic product than those of the early 1980s, Dole’s theory of IRS enforcement made a comeback during Joe Biden’s presidency. The Inflation Reduction Act of 2022 included $80 billion in new IRS funding through 2031 to ramp up enforcement and improve customer service, and the end-of-fiscal year IRS employee total of 100,433 last September was the highest since 1996.
This has now all been thrown into reverse. The House GOP majority already forced a rollback of that additional IRS funding from $80 billion to $60 billion last year, and that was just the beginning. Elon Musk’s Department of Government Efficiency forced out 6,700 probationary IRS employees, and House and Senate budget negotiators will surely be looking for more cuts.
Empowering the IRS was not universally popular with Republicans. Now, the problem for Republicans is that they also have that big deficit to contend with. Reversing the Biden administration’s IRS upgrade — not to mention firing 6,700 people in the middle of tax season — will reduce the revenue collected by the agency by more than the decrease in payroll costs and enlarge the deficit.
How much bigger? Estimates of the payoff from the Inflation Reduction Act’s IRS spending increase range from $561 billion in cumulative additional revenue through 2031 to roughly break-even. One estimate, which concluded that each additional $1.04 in enforcement spending so far has brought in only $1 in additional revenue, comes from a November 2024 brief by the Economic Policy Innovation Center, a conservative think tank that counts only the money generated by two IRS enforcement campaigns. It is clearly a lowball estimate, and I feel confident in saying the actual payoff is somewhere in between.
That’s what the Congressional Budget Office thinks, too. Before Congress rolled back the IRS funding increase last year, the CBO estimated that this would decrease tax revenue by $44 billion over 10 years and thus increase the cumulative deficit by $24 billion. In the CBO’s calculations, incremental IRS spending brings diminishing returns — you get more bang for the first $20 billion than the last $20 billion — so any further cutbacks would have a proportionately larger effect.
With a deficit projected by the CBO to hit $1.9 trillion in the current fiscal year, these aren’t make or break numbers. But turning down this free money by imposing cutbacks on the IRS is a yet another sign that, as political scientist Jonathan Bernstein has argued again and again and again, modern Republicans, unlike Dole back in the day, aren’t actually interested in reducing the deficit.
Justin Fox is a Bloomberg Opinion columnist covering business and economics.
