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The Revenue and Distributional Effects of IRS Funding [1]

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Date: 2025-04

There is substantial focus in Washington policy debates on cutting government spending in the putative pursuit of fiscal sustainability. However, when spending is discussed, it is imperative to think both about the direct costs of the government spending (taxpayer dollars that support different agency missions) and the benefits that society reaps from that spending.

A timely example of the importance of looking at both sides of the government’s ledger is investment in the Internal Revenue Service (IRS), which has been a recent focus. The IRS is responsible for collecting 96% of federal revenue.1 In the last Administration, the agency received a significant influx of funding from the Inflation Reduction Act, which was geared toward modernization and improved compliance and service efforts. Some of those funds have been rescinded, and so far in this Administration, there have been further efforts to decrease the IRS’s footprint by cuts to its workforce.

The Budget Lab estimates that the expansion of funding ($80 billion) for the IRS in the Inflation Reduction Act (IRA) would have led to a net revenue increase of $637 billion over the full 10-year budget window.2 If the IRS shrinks by 50% (a workforce decrease of about 50,000 people),3 we estimate that this significant reduction in IRS staffing and resulting IRS capacity to collect revenues would result in $395 billion ($350 billion net) forgone revenue over the 10-year budget window.4 If the lack of IRS resources leads to a substantial increase in noncompliance, net forgone revenue could rise by $2.4 trillion over 10-years.

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[1] Url: https://budgetlab.yale.edu/research/revenue-and-distributional-effects-irs-funding

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