Enforcement and Who Pays Taxes?

Last month, PGL cited an article by David Cay Johnston. I’m often behind the times, so I figured I’d touch on another theme that Mr. Johnston often covers (and which is often brought up in the comment section of this blog by regular commentator OldVet), namely that there are many ways to cut taxes, and one is simply to cut enforcement. But… when there are tax cuts as a result of reduced enforcement, do those tax cuts affect everyone equally?

One simple proxy for how interested an administration is in enforcement of existing tax rules is to look at how much of the federal budget goes toward the IRS. I didn’t find information on the IRS’s own budget in a quick google search, but OMB Table 4.1 indicates what share of the budget goes to each Federal Agency, and presumably the share that goes to the Treasury is a good proxy for the funding received by the IRS.

From this table we can data on the share of federal income taxes paid by those in the top 1%, 5%, 10%, 25%, and 50% of income makers from 1985 to 2003. We can then break it out into the following groups: top 1%, 1% to 5%, 5% to 10%, 10% to 25%, 25% to 50%, and bottom 50%.

The correlation between the Treasury’s share of the budget in any given year and the amount paid in taxes by each group is shown below:

Income Group__Correlation With Treasury’s Share of Budget
Top 1%_______0.48
1% to 5%______0.20
5% to 10%____-0.56
10% to 25%___-0.47
25% to 50%___-0.39
Bottom 50%___-0.44

What about Treasury’s average share of budget over a five year period?

Income Group__Correlation With Treasury’s Share of Budget, 5 years
Top 1%_______0.87
1% to 5%______0.71
5% to 10%____-0.76
10% to 25%___-0.87
25% to 50%___-0.85
Bottom 50%___-0.90

And Treasury’s share of the budget over 10 years?

Income Group__Correlation With Treasury’s Share of Budget, 10 years
Top 1%_______0.82
1% to 5%______0.82
5% to 10%____-0.73
10% to 25%___-0.91
25% to 50%___-0.92
Bottom 50%___-0.97

Therefore, using the 1985 to 2003 sample available from the IRS, we find that the higher the share of the budget that goes to the Treasury Department (and presumably, therefore, the higher the share of the budget that goes to the IRS), the higher the share of total taxes paid by the top 1% of income earners and the top 5% of income earners. Everyone else’s share of share of total amount paid in taxes falls.

Conversely, as the Treasury (and the IRS) receive less, those in the top 1% and the 1% to 5% of income earners pay a smaller share of total taxes, and everyone else pays more.

Stated bluntly, when enforcement is lax, those who are both willing and able to cheat do so. And if you are wondering…. the Treasury Department’s share of the budget over the past few years:


Postscript. As always, my spreadsheets are available to anyone who wants them.
Postscript 2. It seems to be a particularly auspicious time to post this, considering that PGL just posted something about Mitch Daniels, who as head of the OMB from 2001 to mid-2003 was one of the key people when it came to allocating pieces of the budget.

Update: Minor grammatical changes made.