Tax Analysts Blog

Harry Truman Knew the Truth: IRS Budget Cuts Are Very Expensive

Posted on Feb 19, 2014

IRS budget cuts don't actually save money. In fact, they're very expensive.

Over the past four years, Congress has slashed the IRS budget by roughly 8 percent, saving the government about $1 billion, according to The Boston Globe. But the cuts have also cost that same government about $8 billion in reduced tax collections.

Not exactly a great deal.

There's room to argue about the math behind these calculations. But the general proposition -- that mindless budget cutting actually costs a lot of money -- is not controversial. As the IRS's own National Taxpayer Advocate has pointed out, "each dollar appropriated for the IRS generates substantially more than one dollar in federal revenue."

This budgetary reality is not exactly news; presidents have been complaining for decades that cuts in IRS funding are counterproductive. One early example came in 1947, when Harry Truman scolded Congress for being penny-wise and pound foolish:

"I am advised by the Secretary of the Treasury and the Commissioner of Internal Revenue that the reduction of $20 million in the appropriation for the Bureau of Internal Revenue [as the agency was then known] will mean a reduction in personnel of 4,000 to 5,000 employees and will result in a direct loss of revenue of not less than $400 million in the fiscal year 1948."

Then, as now, Congress chose to ignore the math. "This is a continuation of Mr. Truman's stubborn resistance to any cuts in his padded budget and to the cutting down of any of the persons on the government payroll," declared House Majority Leader, Charles A. Halleck, R-Ind. "The people are demanding that the cost of government be cut and that the number on the Federal payroll be reduced. The Congress is rightly responding to that demand."

Halleck had a point: Voters had endorsed the Republican drive for sweeping budget cuts when they elected GOP majorities to the House and Senate in 1946.

But Truman urged Congress to look beyond campaign rhetoric when it came to funding the Bureau of Internal Revenue. "The administration of the taxing statutes should never be influenced by political considerations," he said. "People of all political faiths are called upon to support their Government through the payment of taxes and are entitled to adequate administrative controls to insure that the dishonest do not shift their share to the honest."

Indeed, this was the real cost of unwise budget cuts -- by hobbling enforcement efforts, the cuts threatened to erode popular support for the tax system itself.

"The vast majority of our taxpayers are scrupulously honest in tax matters," Truman observed. "Taxpayer morale is now generally high, but it will remain so only if the odds remain strong that the would-be tax evader will be detected and punished."

Today's lawmakers might want to give some thought to Truman's warning. Republicans may hate the IRS. But even they need a tax system that works.

Read Comments (6)

edmund dantesFeb 19, 2014

"The administration of the taxing statutes should never be influenced by
political considerations,"

Great idea. You don't seriously contend that this describes today's IRS, do
you? Under Truman, how many IRS employees claimed the 5th amendment before
Congress? None. Was there evidence of politically motivated audits? Not that
I know of. Did top IRS officials lie to Congress on important matters of
potential bias in tax administration? They did not. Did key administrators go
"off plan" to hide their activities from public scrutiny? No.

Mr. Thorndike, Republicans do not hate the IRS, they hate the introduction of
partisanship into tax administration. They hate the continuing stonewalling by
the IRS, they hate the administration's whitewashing of these obvious
problems. Believe it or not, they hate these things because they know that in
the long run, nothing will damage the tax collections more than the loss of
public faith in the fairness of tax administration. That's what is happening
right now.

Cutting the IRS' budget seems to be the only way to get their attention. Until
steps are taken to eliminate all vestiges of political corruption, it's not
going to be possible or appropriate to restore funding. A "tax system that
works" is not one in which 100% of the audits of 501(c)(4) organizations during
any multi-year period are of conservative-leaning ones, as recently revealed by
Rep. Camp.

BTW, the reduced tax collections in the past 4 years are more likely due to the
economic downturn, and the permanent exit of millions from the taxpaying labor
force, than a sudden rise in tax cheating.

bob kammanFeb 19, 2014

Any tax historians out there with the rest of the story? Apparently the budget
cut was enacted. What was the actual reduction in IRS employment? How much
less tax was collected? And since the budget then included the Bureau of
Alcohol, Tobacco and Firearms, are we talking excise taxes here, or income tax?

Joseph J. ThorndikeFeb 20, 2014

Bob -- Don't know if you're looking for some OTHER tax historian to answer your
questions, but if you're willing to read my take, I'm currently researching a
story for Tax Notes on the whole episode.

Joseph J. ThorndikeFeb 20, 2014

Edmund -- I think the budget cuts are a principal CAUSE (though not the only
one) of the loss of faith in tax administration. And I agree that connecting
the dots between budget cuts and lower revenue is complicated. I'm not arguing
for a particular multiplier -- just that there is very likely SOME correlation.
Most objective analyses have come to the same conclusion, I think.

edmund dantesFeb 23, 2014

Mr. Thorndike, few taxpayers are aware of the funding levels at IRS.
Mismanagement is not caused by have a low budget, it's caused by, well,
incompetent administrators.

The story of Christine O'Donnell is the kind of thing that creates a loss of
faith in tax administration. This is an obvious case of criminality, as the
Administration panicked at the possibility of losing a Senate seat to her.
Months have gone by, and still no answers from investigators. Here is her
, in case it's not available to you in the Tax Notes Archive.

bob kammanFeb 25, 2014

Congress passes laws allowing IRS and state tax agencies to exchange
information. A Delaware Department of Revenue employee accesses IRS files
under this reciprocity arrangement, and calls a reporter. This, of course,
should be blamed on Edward Snowden, because the Administration would have told
him to do the same thing and probably did. A co-conspirator is Vice President
Biden, obviously, because he's from Delaware. You don't have to be crazy to
join the Tea Party, but it helps.

Mr. Thorndike: I'm looking for a historian whose publications I can access
without paying more than is affordable by a sole practitioner who works for
middle-class and poor clients, often for reduced fees or pro bono.

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