The president's legislative and budget proposals for tax enforcement will mostly serve to maintain the status quo and will not make a meaningful reduction in the $300 billion-plus tax gap. Modest Funding Increase Maintains Untenable Status Quo The administration proposes an increase of about $440 million for tax enforcement. The president claims that the proposed increase — with $149 million for increased costs and $291 million for new staff — will build the IRS's capacity to collect taxes. The new funds are meant to reduce the $300 billion tax gap - or difference between the amount of taxes owed and the amount the IRS collects. The IRS National Taxpayer Advocate estimates that the tax gap imposes an extra $2,200 in taxes on the average compliant taxpayer. While more funding to address the tax gap is a step in the right direction, the president's budget predicts only a meager increase in revenues due to that funding —$611 million. Given the $300 billion tax gap, a more significant increase in enforcement funding is warranted. With such an insignificant funding increase, the IRS will not have the capacity to perform more audits on higher-income individuals and large businesses and corporations. The audit rate on these taxpayers has dropped precipitously since the early 1990s, and it would take a much more significant increase in funding to bring audit rates back to where they were. These lower audit rates have helped enable a reportedly growing trend of tax manipulation and cheating by wealthy individuals and businesses. Further, the president's claim that the increased funding will be used to boost staffing levels is misleading. The budget increase will mostly serve to restore IRS enforcement funding to about where it was in FY 06, as the IRS will likely experience cuts in FY 07. It is also insufficient in the context of a $12 trillion economy and growing tax compliance challenges. From 2006 to 2008, the President projects that the economy will grow at about three percent annually, with tax revenues growing at about seven percent. But the IRS enforcement budget that the president proposes grows by only 2.8 percent relative to FY 2006 budget authority. This would leave the IRS enforcement budget slightly smaller relative to the economy it monitors and much smaller relative to the total revenues it is charged with collecting. Wasteful Privatization Program Diverts Needed Resources In addition to insufficient funding for the total IRS budget, the president's budget proposes to divert additional funding for the privatized collection program the IRS initiated in September. The program authorizes private collection agencies to track down taxes that IRS agents have identified and located but not collected. The president's own budget figures reveal how wasteful the privatized program is. In FY 2007, the proposal estimates that the program will bring in $46 million in taxes at a cost of $22 million — a cost-benefit ratio of nearly 2 to 1. If IRS staff had performed these duties, IRS itself has estimated that the ratio of taxes collected to funds spent on staffing could be nearly 30 to 1. Nothing is keeping the president from requesting funding to hire IRS staff that would perform the tasks that have been outsourced to private companies. If more money is appropriated, more than $20 million in additional taxpayer dollars this year alone could be sent directly to the Treasury. What the president is proposing is tantamount to saying that instead of putting the $20 million towards the public good, the IRS ought to give it away to private companies. Productive but Insufficient Legislative Proposals The president also asks for new legislation that would reduce the tax gap. The legislative proposals include expanding tax information reporting and raising penalties on tax noncompliance. These modest proposals appear to be good-faith attempts at reducing the tax gap without imposing burdens on compliant taxpayers. Such incremental improvements, though, are not enough to fundamentally change size of the tax gap. The Treasury Department estimates that these legislative proposals will bring in $29 billion over 10 years. The 10-year tax gap is projected at over $3 trillion. Since these new proposals may close only about 1 percent of the gap, it is clear much more is needed to make real progress on the tax gap. Details of President's Budget Fails to Match Rhetoric The president claims he wants to put in place policies that will lead to a balanced budget in 2012. But if the administration truly cared about balancing the budget, it could have made bold proposals to increase the amount of revenues the IRS collects. Such a strong plan would have truly captured the president's goals of reforming the tax code to make it simpler and fairer, as the end result would be to reduce the extra burden that unpaid taxes impose on compliant taxpayers. Congress ought to demonstrate its commitment to tax fairness by building upon the good but insufficient proposals in the president's budget and repealing the wasteful privatization program.