At TQC, we believe in a progressive tax code. People who earn more should pay more. However, a progressive tax code must be applied thoughtfully. We agree with the position taken by many on the right who argue against excessively high marginal tax rates. A disproportionate number of people who would bear the burden of marginal tax rates over 50%, proposed by some politicians on the left, are responsible for creating a disproportionate number of jobs in America.

We must be careful not to impose a marginal tax so burdensome that it takes away job creators' economic incentive to offer employment opportunities for working Americans. That is suboptimal for all Americans.

It is imperative to keep in mind: most higher-earning people in the United States already do pay significantly more in taxes, as they should.

We align ourselves with many on the left who argue that although marginal tax rates are higher for the wealthy, it is unjust that some extremely rich individuals (and corporations) can take advantage of loopholes in the tax code to cut their tax rate to a level lower than what working-class and middle-class Americans pay, in some cases to 0%.

At TQC, we do not begrudge those individuals (and companies) for utilizing the existing tax code to reduce their tax bill; any rational person would do so. That said, many regressive loopholes in the tax code should be closed or curtailed. Without debate, they disproportionately help the very wealthiest Americans. Very few working-poor, middle-class, and even higher earning Americans benefit from these carve-outs. We believe that is regressive and unfair.

The IRS

Democrats and Republicans certainly have divergent principles regarding tax policy. However, if there is one thing about taxes that they should both agree on, it is this: The Internal Revenue Service is woefully underfunded. This is a serious problem. The primary blame falls on our elected officials.

Unsurprisingly, for most lawmakers regardless of party affiliation, directing resources to rectify the problem is not high on their respective priority lists. After all, allocating money to the IRS will not garner politicians many votes.

The IRS employs ~72,000 people; its annual budget is ~$12 billion dollars. That sounds like a lot of money. In this context, it isn’t it is a pittance. To help put ~$12B in perspective, consider that funding for the IRS has not even kept pace with inflation, even though over the last few decades the tax code has grown materially in length and complexity. For instance, in the 1950s, the tax code was comprised of ~400,000 words. Today it is has ~4,000,000…and growing.

Indeed, seemingly every year, lawmakers add new amendments to the tax code without allocating sufficient resources to the IRS to effectively implement and enforce them. It should come to nobody’s surprise then, that each year that passes, the IRS and its employees find themselves increasingly undermanned, overwhelmed, and outmaneuvered by expensive tax attorneys representing private citizens and corporations.

We all - well at least most of us - dislike the IRS. Delayed refunds, lack of timely communication, and horrific customer service are the most common gripes. Like any large bureaucratic organization, there is certainly a cadre of underperforming workers at the IRS. However, the agency also has many exemplary employees.

Often some of the best tax attorneys and accountants begin their careers at the IRS. They are smart, motivated, and thoughtful. In their defense, how can they possibly be tasked with executing audits, issuing refunds on time, parsing through documents, and generally navigating one of the most complicated tax codes in the world with a budget that has not even kept pace with inflation? The short answer is they can’t.

Nobody enjoys being on the receiving end of an audit. And today, most people do not have to worry about being the subject of one. Consider that in the 1960s, the IRS audited ~3% of all tax returns (individual and corporate) that number is now .5%, or put another way, a reduction in frequency of ~83%!

For most honest citizens, paying taxes is something we tend to complain about and then begrudgingly cut a check to the Treasury Dept. Some scofflaws will avoid paying taxes no matter what. Others need incentives, such as the threat of an audit, to keep them from acting ignobly. For this cohort, rising odds of getting caught equate to lower instances of tax avoidance.

For the individuals that do cheat, an actual audit might result in all or some of the money in question being remitted to the Treasury.

Why We Should Care

A gaping spread between the IRS’s current level of funding and what it needs to perform its duties satisfactorily results in the American public being defrauded out of ~600 billion dollars per year in unpaid taxes.

The government is typically a shoddy steward of the public purse. But if just a portion of those funds found their way into public infrastructure, schools, childcare, basic research, etc. America would be better for it.

What Should Be Done

Aside from a few notable exceptions, the government rarely achieves a good return on its investments. That said, one of the best investments our government could, and should, make is to substantially increase the budget of the IRS.

Assume for argument’s sake that lawmakers increased the IRS’s budget by a whopping 40 billion dollars, from $~12B to $~52B per year. That sounds like a lot, and it is. But even if a four-fold increase in IRS funding results in the government reaping just 100B (or ~17%) of the 600B in unpaid taxes, Uncle Sam would still earn 150% on its investment, per year!

Let us be clear, we are not saying that exponentially more funding would result in the government recouping all, 80%, 70% or even 50% of what is owed; that prediction would be too aggressive. But again, even if they managed to recoup just 17% of the outstanding balance, it would translate into a 150% return.

At TQC, we always respect the fact that we could be wrong. Let’s run some figures to depict the outcome(s) if our estimate(s) are incorrect. If the government managed to claw back $200B of $600B, or 30% of what is owed, the investment would return 400%! If our base case of ~17% proved too aggressive and only 10% or $60B was recovered, the government would still earn ~50% on its investment on annual basis. Not to mention, you might even receive your refund on time and get a real live customer service representative on the phone.

This is a mutually beneficial investment upon which members of both parties can and should agree.