Trump-Era IRS Cuts May Cost U.S. $1 Trillion in Lost Revenue

Former U.S. Treasury Secretary Lawrence Summers has expressed concern that the downsizing of the Internal Revenue Service (IRS) under the Trump administration, coupled with other policy changes, could lead to a significant decrease in tax compliance. This could result in the federal government losing up to $1 trillion in revenue over the next decade.

Summers emphasized that the reduction in the IRS workforce poses a threat to the foundation of the tax system, which relies on voluntary compliance. He warned that if the IRS is weakened, taxpayers may be less inclined to adhere to tax laws, leading to substantial financial losses for the government. Summers stated that he and his colleagues are analyzing the potential impact of these changes, and he would be surprised if the government does not lose more than $1 trillion in revenue over the next ten years due to these actions.

Reports indicate that approximately 20,000 IRS employees, about one-fifth of the agency's total workforce, have accepted delayed resignation plans. Earlier this year, around 4,700 employees accepted the first round of resignation offers, and an additional 7,300 probationary employees were placed on administrative leave. The leadership of the IRS is also in turmoil, with the agency currently being led by its fifth acting commissioner since Trump took office in January.

Summers noted that the most capable and employable IRS staff are likely to be the first to leave, further weakening the agency's ability to enforce tax laws. He also pointed out that when the president undermines the government's legitimacy and the IRS's ability to process tax returns and conduct necessary audits, it can erode the willingness of households and businesses to comply with tax laws.

Summers predicted that more people will resort to cash payments for income that goes unreported. Others may engage in suspicious transactions with accomplices or manipulate asset valuations to avoid taxes. He also anticipated an increase in the misuse of tax avoidance tools. These actions could further exacerbate the revenue loss for the federal government, which relies heavily on tax collections to fund its operations and programs.

The potential loss of $1 trillion in revenue over the next decade is a substantial amount that could have wide-ranging implications for the federal government's ability to fund its programs and services. This loss could lead to cuts in government spending, increased borrowing, or a combination of both. It could also result in a decrease in the government's ability to invest in critical areas such as infrastructure, education, and other sectors essential for long-term economic growth and competitiveness.

Summers' warning underscores the importance of maintaining a robust and well-funded IRS to ensure that taxpayers comply with their tax obligations and that the government has the resources it needs to function effectively. The reduction in the size of the IRS, along with other policy changes, could have significant long-term financial implications for the federal government and the country as a whole. It is crucial for policymakers to consider these implications and take steps to ensure that the IRS has the resources it needs to effectively collect taxes and enforce tax laws.