What Could You Do With an Extra $458 Billion a Year?

For years, Democrats have been critical of dynamic scoring, where estimates of the effect of a bill on the government’s bottom line include not just changes to taxes or spending in the bill itself, but also impacts from an allegedly faster-growing economy that would result from the policy changes. Republicans say dynamic scoring of “pro-growth” policies like certain tax cuts show controlling the budget needn’t be a painful either-or choice.

In that sense, dynamic scoring may be similar to another oft-touted way to cut the deficit: improving enforcement of the U.S. tax code. A new IRS report shows the annual tax gap—the difference between taxes owed and taxes paid on time—stood at $458 billion in the 2008-2010 time frame, with a compliance rate for individuals and companies of about 82 percent.

“This is money that could be put to good use shoring up critical programs such as Medicare,” said Ron Wyden of Oregon, the Senate Finance Committee’s ranking Democrat. “It’s time the IRS put an effective tracking and auditing system in place to locate this lost money.”

Sen. Ron Wyden

Ron Wyden (Photographer: Victor J. Blue/Bloomberg)

But how big a difference could an extra $458 billion a year make in the federal budget? A good deal. In 2015, the government spent $3.688 trillion while only taking in $3.249 trillion, for a deficit of $438.9 billion—smaller than the 2008-2010 annual tax gap.

Wyden urged an IRS crackdown on corporations, which the agency estimates to be responsible for about $44 billion of the annual gap. That alone would almost cover the $49 billion the government spent on international affairs in fiscal 2015.

Most government spending is on so-called mandatory programs—such as Social Security, Medicare and Medicaid—and the discretionary appropriations that lawmakers spend most of their time debating are much smaller. Under the budget deal reached late last year with the White House, regular fiscal 2017 appropriations—excluding emergencies and funds for overseas military operations—will total $1.07 trillion. The portion known to budget geeks as NDD—nondefense discretionary—totals $519 billion, just slightly larger than the tax gap.

Notably, the IRS report said about 27 percent—or $125 billion—of the tax gap came from people underreporting their business income. That's about $35 billion more than the government spent on transportation in 2015.

Former Senate Budget Committee Chairman Kent Conrad (D-N.D.) used to say that closing the tax gap should be the first step toward narrowing the budget deficit before resorting to tax increases.

Sen. Kent Conrad

Kent Conrad (Photographer: Chris Kleponis/ Bloomberg)

But any effort to recapture lost tax gap revenue would require big spending increases on IRS enforcement—a politically unlikely outcome for an agency facing hostility from Republican lawmakers and struggling to cope with years of tight budgets. And even Democrat Wyden, in his statement, did not mention going after underreported income.