The Paradoxical Fiscal Hawk: How Cutting the IRS Could Cost the Government Money
The new administration, spearheaded by figures like Elon Musk and echoing the fiscally conservative rhetoric of the previous Trump era, has declared a national financial emergency. Their solution, they claim, is drastic austerity, a surgical cutting away of government spending deemed unnecessary. However, one particular area targeted for reduction – the Internal Revenue Service (IRS) – reveals a glaring contradiction in their approach. Laying off IRS employees, particularly those involved in auditing and collections, risks undermining the very financial stability the administration claims to be pursuing, potentially costing the government far more than it saves.
Musk’s "Department of Government Efficiency," acting as the vanguard of this cost-cutting offensive, has reportedly orchestrated the elimination of up to 6,700 IRS positions. The layoffs, already underway, disproportionately affect those involved in tax enforcement, including over 5,000 auditors and collection agents. The fact that many of those dismissed are probationary employees, lacking severance benefits, might seem like a cost-effective move. However, the long-term economic consequences of weakening the IRS’s enforcement capabilities are significant and potentially devastating to government revenue.
The fundamental flaw in this logic lies in the understanding of how the IRS operates and its critical role in revenue generation. The IRS is not simply an expense; it is an investment. The money spent on employing IRS agents, especially those dedicated to auditing and collections, generates a far greater return for the government. By ensuring that individuals and corporations pay the taxes they legally owe, the IRS directly contributes to the national treasury. A reduction in the IRS workforce inevitably leads to a decline in tax compliance, particularly among those with the resources to exploit loopholes and evade their tax obligations.
This is not mere speculation; it is a demonstrable fact supported by recent evidence. The Biden administration, recognizing the importance of a well-funded IRS, championed the Inflation Reduction Act, which included an $80 billion investment in the agency over a ten-year period. A significant portion of this investment was earmarked for enhancing tax enforcement activities, including the hiring of additional IRS agents. The results were immediate and impressive.
In the two years following the enactment of the Inflation Reduction Act, the IRS workforce expanded by more than 15,000 permanent employees. This increased manpower allowed the agency to intensify its scrutiny of high-income individuals and corporations, leading to a surge in tax revenues. Gross tax collections jumped from $4.7 trillion in fiscal year 2023 to approximately $5.1 trillion the following year, representing a substantial increase in revenue.
While overall economic conditions undoubtedly play a crucial role in determining tax revenue levels, the Government Accountability Office (GAO) has identified a significant connection between increased IRS enforcement and the recent revenue surge. According to a GAO report, much of the increase in tax revenue during the 2023-2024 period stemmed from enforcement activities targeting individuals earning over $400,000 per year. The agency’s ability to focus on these high-income earners, who often engage in complex tax avoidance strategies, was directly attributable to the increase in staffing levels.
The impact of enhanced IRS enforcement on tax collection from the wealthiest Americans is particularly noteworthy. In fiscal year 2024, the agency collected approximately $1.1 billion from just 1,600 wealthy individuals with outstanding tax debts, a staggering increase from the $38 million collected in the previous year. This dramatic improvement was made possible by the IRS finally having the resources to properly investigate and pursue these complex cases. The agency’s efforts helped to close a portion of the estimated $696 billion tax gap, the difference between taxes owed and taxes actually paid.
Furthermore, it is important to recognize that the efficiency of the IRS has actually improved in recent years, despite the increased funding. The cost of tax collection, measured as the amount spent by the IRS for every $100 collected, has declined to near historic lows. In fiscal year 2023, the IRS spent only 34 cents for every $100 collected, demonstrating a remarkable return on investment. This increased efficiency further strengthens the argument against cutting the IRS workforce.
Despite this compelling evidence demonstrating the positive impact of a well-funded and staffed IRS, the new administration remains committed to reducing the agency’s size and scope. The proposed layoffs are likely just the beginning, as the Trump administration has also floated the idea of creating a separate "External Revenue Service" funded by tariffs, ostensibly to replace the IRS. While the feasibility and legality of such a proposal are highly questionable, the underlying intent to fundamentally restructure and weaken the nation’s tax collection system is undeniable.
Any further reduction in the IRS workforce, whether through direct layoffs or the creation of a parallel system, would likely lead to a corresponding decline in tax collections, particularly among the wealthiest Americans who have recently been targeted for increased enforcement. This would exacerbate the budget deficit and undermine the administration’s stated goal of achieving fiscal stability.
The decision to cut the IRS workforce is therefore a paradoxical one, driven by ideological fervor rather than sound economic policy. It is a shortsighted approach that prioritizes immediate cost savings over long-term revenue generation. By crippling the agency responsible for collecting the taxes that fund vital government services, the administration is effectively cutting off its nose to spite its face.
Instead of dismantling the IRS, the administration should focus on building upon the progress made in recent years. A well-funded and properly staffed IRS is essential for ensuring that all individuals and corporations pay their fair share of taxes. By investing in tax enforcement, the government can generate significant revenue, reduce the budget deficit, and create a more equitable tax system for all Americans. Cutting the IRS, on the other hand, is a recipe for fiscal disaster, a self-inflicted wound that will ultimately undermine the nation’s financial stability. The administration’s current course risks proving the old adage: penny wise, pound foolish.
