Comment by AnthonyMouse

Comment by AnthonyMouse 8 days ago

These are studies designed to show positive results, and are susceptible to the criticism the parent identified.

IRS enforcement has diminishing returns because the IRS starts with the small minority of people who are very obviously cheating on their taxes. Those people get audited and the IRS very easily recovers money from them. If you want to audit more people than that, you have to audit people who are less likely to be cheating. The more people you want to audit, the lower the collections rate gets.

But if you're averaging in the recovery rate from the people who are so obviously cheating, you can get quite far down the road past a marginal benefit before the average becomes a negative number.

Meanwhile, even that isn't considering the indirect costs. The IRS spends $1 and recovers $2, but audits are much cheaper than the IRS than they are for taxpayers. So the IRS spends $1 and the taxpayers (many of whom did nothing wrong, because we're talking about averages here) have to pay $5, in order for the IRS to recover $2. That's quite bad -- $6 is being spent in order to recover $2, but it's being reported as a $1 net gain.

And it's worse than that, because those $6 aren't just money, it's actual spending -- human labor hours that couldn't be allocated to something else -- so what you're losing isn't the cost of that labor, it's the value of that labor. Someone was being paid $1 to create $2 in value but now instead of doing that they have to spend that time on an audit, so the $6 in cost is actually $12 in lost value.

Not accounting for things like this makes it seem like we should be spending a lot more resources on something with diminishing returns and large hidden costs.

LamaOfRuin 8 days ago

The criticism the parent identified has almost nothing to do with these studies. It was that there is an equilibrium point where enforcement is counterproductive, but it did not identify anything about where that is or how that point relates to where we are.

At some point it gets to that level, but all of these studies show it is extremely far from that at present. This is also not at all what the IRS has been advocating going after.

The extremely cheap (for the IRS) audits you are talking about are the ones they have been doing for years because they can afford to. The tax situations are simple so don't require significant resources to audit. These are also the situations the original comment was talking about. The IRS and others have been advocating for years for the resource to go after actual tax cheats of wealthy individuals and corporations, whose tax situations are (intentionally) so complex that it is a serious investment to audit. Once you do audit them however, their tax dodging decreases for years into the future. This costs the employees and financial advisors dedicated to dodging taxes money.

The "hidden costs" you are so concerned about here, in many cases cannot be argued to exist. The people that would spend time defending violators are otherwise fully employed doing the opposite... coming up with ways to get around the taxes their employers or customers are supposed to be paying. Instead of costing $2, that comes out as getting yet another $2 out of that audit by distracting a societal parasite.

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AnthonyMouse 8 days ago

> The criticism the parent identified has almost nothing to do with these studies.
The criticism the parent identified is that the cost to the IRS is not the total cost to the public (i.e. innocent taxpayers being audited despite making only honest mistakes or having done nothing wrong at all), which is exactly a problem with these studies. To know where the equilibrium point is, you have to take into account these other costs, and the studies fail to do that.
> The IRS and others have been advocating for years for the resource to go after actual tax cheats of wealthy individuals and corporations, whose tax situations are (intentionally) so complex that it is a serious investment to audit.
What's really going on here is that those are the taxpayers it isn't as cost effective to audit because they have sophisticated lawyers, so they're much less likely to be violating the law. They're doing something which is complicated and then paying very little in taxes, but the complicated thing they were doing is legal so you can't get anything from auditing them. Meanwhile auditing them costs a lot because it's so complicated, so the ROI of doing it is pretty bad.
In particular it's worse than the ROI of auditing other taxpayers who can't afford such expensive lawyers and therefore are more likely to have made a mistake that allows the IRS to collect. But auditing those people makes the IRS much less sympathetic, because those people aren't the billionaires and the money the IRS collects is mostly a result of honest mistakes.
> Once you do audit them however, their tax dodging decreases for years into the future.
The assumption is that they were doing something unlawful to begin with, and then you're talking about the non-billionaires again.
Moreover, what really happens is that the people who made mistakes learn to hire tax lawyers. And then if you audit them again it comes up clean, but that doesn't mean they're paying more in taxes, because tax lawyers are pros at finding legal ways to avoid taxes, so what you've really done is encourage them to hire the people whose primary job it is to minimize tax revenue.
> The people that would spend time defending violators are otherwise fully employed doing the opposite... coming up with ways to get around the taxes their employers or customers are supposed to be paying. Instead of costing $2, that comes out as getting yet another $2 out of that audit by distracting a societal parasite.
It is definitely not the case that the number of tax lawyers and accountants employed is unrelated to the number of audits the IRS does. The more they do, the more business there is for those professions and the more people enter them. These are people who could have been doing something else and, moreover, people who consumed the resources that someone else could have used to do something better.

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ethbr1 8 days ago

If you want to account for the social cost: moral hazard.

Who pays taxes when it's well known that the IRS doesn't audit and follow up on tax cheats?

Especially, if all it takes to further dissuade them is engineering complex wealth structures and keeping tax lawyers on retainer.

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AnthonyMouse 8 days ago

> Who pays taxes when it's well known that the IRS doesn't audit and follow up on tax cheats?
But they do. They always have. The question is, once they've done that, should then they proceed to audit an even larger number of mostly innocent people, because a small percentage of them did something wrong and finding that small percentage would cover the costs of the IRS, but not any of those other innocent people?
> Especially, if all it takes to further dissuade them is engineering complex wealth structures and keeping tax lawyers on retainer.
This is an entirely different problem. The ones with sophisticated lawyers aren't actually violating the tax code. The problem there is that the tax code is so complicated and poorly considered that fancy lawyers can find ways to avoid taxes without violating the law.

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jay_kyburz 8 days ago

If you have been found to be cheating on your taxes, you should pay a fine that covers the cost of the audit.

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AnthonyMouse 8 days ago

They already have that. The problem is, in order to find someone who is actually cheating, they have to audit a lot of innocent people, and who is covering the cost of those audits when they don't find anything?

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