Headlines in recent days have quoted unnamed Internal Revenue Service and Treasury Department officials who are worried that federal tax revenues could drop by $500 billion or more this year. One expert with the Cato Institute says there’s reason to be skeptical of such a dramatic outcome — even if the Trump administration is taking what he sees as “hypocritical” action to curtail the IRS workforce while simultaneously seeking to add complexity to the tax code.
According to Chris Edwards, Kilts Family Chair in Fiscal Studies at the Cato Institute, the gap between taxes owed and taxes paid has remained stable over time, even as policy priorities have shifted and the balance of power in Washington has changed hands. So, while big cuts to the IRS staff and a demoralization of its workforce may very well cause disruption, he doubts that revenue will fall a full 10% this year.
Edwards testified about the tax gap before Congress in 2023, and he recently offered his perspective in an interview with ThinkAdvisor. Both political parties, he maintains, have failed to truly modernize the IRS or rationalize the tax code, which together are the main drivers of revenue loss. Short of a real change in political norms, Edwards warned, the “tax gap” is likely here to stay.
What the Numbers Show
The federal “tax gap,” Edwards explained, represents taxes owed but not paid on time, loosely viewed by the public and policymakers alike as the amount of “tax cheating.” The IRS has released an updated estimate showing that the tax gap has trended down as a share of gross domestic product over the past 20 years.
“Despite increasing political rhetoric to the contrary, tax cheating is not a growing problem,” Edwards said.
The gross tax gap in 2022, for example, was $696 billion. After late payments and enforcement actions, the net tax gap was reduced to $606 billion. Of the gross total, $514 billion stemmed from individual income taxes, $50 billion from corporate income taxes, $127 billion from payroll taxes and $5 billion from estate taxes.
“The data shows the tax gap was 2.7% of GDP in 2022,” Edwards said. “The gap has been roughly flat over the past decade and down a bit from two decades ago.”
Furthermore, Edwards asserted, some of the tax gap is not outright cheating but rather a misunderstanding of the code.
“Unfortunately, both political parties have proposed changes that would add complexity to the tax code, frazzle taxpayers and cause more errors,” Edwards said.
Hypocritical Priorities?
To be clear, Edwards said, cutting IRS staff will likely cause “real customer service problems” and make it even harder for the typical American to get expert help in filing taxes or experiencing an audit. But he doesn’t think that staff reductions will prompt a wave of tax cheating by the wealthy along the lines of the warnings from IRS officials reported in the Washington Post.
“As I testified to Congress, I was against the big increase in funding for IRS enforcement that was made as part of the Inflation Reduction Act,” Edwards said. “But I also agreed that it was reasonable to say that more staff and resources could be deployed for technology improvements and better customer service that is so clearly needed at the IRS. This is a bigger problem than policing the super-wealthy. If you look at the IRS audit data, it’s middle-income people who ‘cheat’ the most.”
Rich people are generally paranoid about running afoul of the IRS, Edwards said, and they spend significant amounts of money contracting tax experts who make sure that they are filing taxes timely and without errors. With significant expertise at their disposal, he added, the wealthy are able to reduce their tax burdens in ways that are not illegal but instead based on the system's complexity. Tax loopholes, he noted, are a different matter than outright "cheating."
“What I do find worrying is the hypocrisy that is inherent in some of what the Trump administration is trying to do with respect to taxes and the IRS,” Edwards said. “For example, they want to add complexity by eliminating taxes on tips and Social Security. To make that actually work, you are going to need more IRS tax administrators, not less. I believe we can and should live with a smaller IRS, but it has to be based on thoughtful policy compromise.”
Pictured: Chris Edwards
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