Understanding the Revenue Potential of Tax Compliance Investment

18 Pages Posted: 21 Sep 2020

See all articles by Natasha Sarin

Natasha Sarin

University of Pennsylvania Law School

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

Abstract

In a July 2020 report, the Congressional Budget Office estimated that modest investments in the IRS would generate somewhere between $60 and $100 billion in additional revenue over a decade. This is qualitatively correct. But quantitatively, the revenue potential is much more significant than the CBO report suggests. We highlight five reasons for the CBO’s underestimation: 1) the scale of the investment in the IRS contemplated is modest and far short of sufficient even to return the IRS budget to 2011 levels; 2) the CBO contemplates a limited range of interventions, excluding entirely progress on information reporting and technological advancements; 3) the estimates assume rapidly diminishing returns to marginal increases in investment; 4) the estimates leave out the effect of increased enforcement on taxpayer decision-making; and 5) the use of the 10-year window means that the long-run benefits of increased enforcement are excluded. We discuss these issues, present an alternative calculation, and conclude that a commitment to restoring tax compliance efforts to historical levels could generate over $1 trillion in the next decade.

Keywords: Income taxation, Internal Revenue Service budget, investments in tax compliance, audit rates, overhaul of IRS technology, third-party reporting, diminishing returns, deterrence, longer-term enforcement gains, additional revenue generation, CBO underestimate, alternative estimate of compliance gains

JEL Classification: H0, H2, H22, H26, K49

Suggested Citation

Sarin, Natasha and Summers, Lawrence H., Understanding the Revenue Potential of Tax Compliance Investment (July 2020). U of Penn, Inst for Law & Econ Research Paper No. 20-50, Available at SSRN: https://ssrn.com/abstract=3695215 or http://dx.doi.org/10.2139/ssrn.3695215

Natasha Sarin (Contact Author)

University of Pennsylvania Law School ( email )

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Lawrence H. Summers

Harvard University ( email )

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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