Earlier quoted context omitted.
People greatly overestimate the amount of material cheating that happens, especially among large companies and the wealthy. I used to work for a Federal audit organization and almost all of the recoveries had a root cause in sloppy compliance and record-keeping practices rather than intentional malfeasance. It is broadly recognized as optimal that the recovered money should be several-fold the direct costs spent to r…
>AFAIK, the increased spending at the IRS did not lead to concomitant offsetting recoveries. This is a predictable outcome, the amount of enforcement activity has been pretty finely tuned for decades to optimize ROI. Most of the recoveries come from changing focuses on compliance to areas that haven’t seen much enforcement activity in many years. Fighting entropy basically. AFAIK, all the data shows exactly the oppos…
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.