The Declining Tax Capacity of the United States Government
The following table says it all:
Readers of this website should know that I am a firm believer that a society’s capacity to survive is based on its capacity to collect taxes. If you want to know why I feel this way, read my Tax Revolt: How the Conservative Middle Class Became a Serious Problem for Capitalism https://www.samuelcohn.net/tax-revolt and Why Tax Cuts Don’t Create Jobs https://www.samuelcohn.net/tax-cuts , both being essays on this website. Adequate government finance is essential for national defense, for the preservation of infrastructure, for effective diplomacy, for the maintenance of infrastructure, for the support of education, for maintaining both scientific research and our national technological advantage, and as we have recently seen, for being able to respond to unexpected crises such as the COVID-19 pandemic.
The bad news is that the federal government’s ability to collect taxes has steadily declined in the last twenty years. The above table show the author’s calculations based on collections data provided by the IRS in the 2018 Internal Revenue Data Book https://www.irs.gov/pub/irs-pdf/p55b.pdf and standard data on valuations in real dollars and the size of the American economy as measured by Real Gross Domestic Product.
Gross tax collections have fallen consistently since 1989. In 1989, George Bush Senior was able to collect just under 11% of the American GDP in taxes. In 2018, that number has fallen to just over 9%. Some of this is to be expected, since there were three major tax cuts between 1989 and the present day, two by George Bush Junior and one by Donald Trump. These undoubtedly had their effects.
But note that tax collections were also falling before the great tax cuts. This was the result of diminished IRS staffing. The Internal Revenue Service had already lost 14% of its staff between 1989 and 1998. By 2018, it would lose another 25% beyond that. This seriously diminished the capacity of the IRS to enforce tax laws and do audits.
To be sure, the IRS was able to compensate somewhat by greater efficiency and automation. One of the most significant improvements was the introduction of computerized auditing. The computers do two jobs that are fairly important. On one hand, they identify cases of failure-to-file and under-reported income. The IRS collects data on income sources such as wage payments, interest payments, capital gains and dividend distributions. The computers will pick up if you fail to report that income on your taxes. The computers also check for math errors. Math errors are random and hurt the taxpayer as often as they help. Being able to resolve these without human intervention is helpful. Because of these clear increases in efficiency and productivity, the IRS correctly notes that the collection yield per IRS employee has risen significantly since 1989.
That much is good.
But the bottom line is that even though the American population has grown, and the American economy has expanded, federal tax collections have failed to keep pace. In 2018, the federal government collected only 83% of what it had collected in 1989 as a percentage of the GDP.
Government spending did not go down to reflect lower collections. Although some of this spending may have been questionable (such as spending on the US-Mexico wall), much of those expenses represented real needs such as the need to modernize the military. Protecting the nation from coronavirus has now produced a great and even more urgent need to spend federal monies.
How low can the Federal Government go and still stay functional?
I honestly don’t know.
However, not staffing the IRS and not enforcing the tax laws that are already on the books seems counterproductive. The IRS may be one of the only departments of the federal government that earns more than its’s expenses. In 2018, each employee of the Internal Revenue Service brought in $47.1 million dollars on average – the value of total IRS collections divided by the total number of IRS personnel.
I suspect the IRS could hire a tax accountant, or a computer programmer or a tax lawyer at a salary of less that 47.1 million dollars a year. The rest of the money is pure profit for the federal government.
People who say the government should act more like a business should take profit maximization very seriously. Staff for the IRS pays for itself handsomely. Our nation needs to invest more in this critical resource.