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We estimate the returns to IRS tax audits across the income distribution. We find $1 of IRS spending on audits of top earners delivers more than $12 of tax revenue. Along the way, we provide new evidence of the strong specific deterrence effects of audits. 1/:
We estimate the returns to IRS tax audits across the income distribution. We find $1 of IRS spending on audits of top earners delivers more than $12 of tax revenue. Along the way, we provide new evidence of the strong specific deterrence effects of audits. 1/:
More than $500 billion in tax obligations go unpaid each year in the US. Most of these liabilities are concentrated among high-income taxpayers. Can additional spending on audits recoup those unpaid taxes? How do the returns to audits vary across the income distribution? 2/
In joint work with Will Boning, @bsprungkeyser, and Ellen Stuart, we use detailed cost and revenue data for the universe of IRS audits. We focus on measuring the returns to in-person audits of individual taxpayers. 3/
While audit costs rise with taxpayer income, the returns rise even more. When we consider the returns to marginal audit expansions and incorporate specific deterrence effects, we find 5:1 returns at the bottom of the income distribution and 12:1 at the top. 4/
One key component: audited taxpayers pay more in taxes for at least 14 years after an initial audit. We use randomized audits to measure these deterrence effects. For every $1 an audited person pays during their audit, they pay $3 more on their taxes in the subsequent years. 5/
How do these results relate to the current debate over IRS funding? Scoring particular bills is beyond the scope our work. That depends exact hiring practices, the efficiency of training , non-enforcement costs. But…6/
Our finding of significant deterrence effects throughout the income distribution differs from existing CBO scores. The incorporation of a 3x deterrence multiplier would substantially increase the estimated return to IRS funding. 7/
For an overview of our work, check out @crampell’s fantastic coverage in the Washington Post
washingtonpost.com/opinions/inter…
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washingtonpost.com/opinions/inter…
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For more detail on our findings, including a discussion of the MVPF of audits and the return to marginal versus average audits, check out this thread from @bsprungkeyser
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https://twitter.com/bsprungkeyser/status/1668950510743826434
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