Federal Reserve Chairman Ben Bernanke this week patiently tried to explain to Congress how budget cuts in a weak economy can actually be counterproductive for deficit reduction. By stifling economic growth, those cuts cause more joblessness, thereby reducing revenue and increasing expenditures for programs like unemployment insurance.
The so-called “sequester” that goes into effect today barring a last-minute deal by Congress will knock 0.6 percent off economic growth and kill up to 750,000 jobs, according to independent estimates. But there’s at least one more way in which the sequester could hurt revenue — by cutting the budget of the Internal Revenue Service, the very agency charged with collecting revenue:
Here’s some welcome sequester news: The Internal Revenue Service says those across-the-board automatic spending cuts will not delay processing of individual income tax refunds, and may mean fewer audits.
The agency has warned its more than 100,000 employees to expect furloughs of one day per pay period — but not until this summer, after tax filing season ends. [...]
However, once staff cut-backs begin to take hold, the collection agency says, taxpayers could experience delays on calls to help lines and visits to taxpayer assistance centers. They will also face potentially fewer audits, with less staff to perform the reviews.
The IRS estimates that every dollar spent on enforcement brings in $4-$5 dollars of additional revenue. As Reuters’ David Cay Johnston found, every hour spent on corporate tax enforcement bring in more than $9,000 in revenue.
Already, the IRS has been facing a bigger job with fewer resources. The sequester is going to make that worse, and in the meantime, won’t even accomplish its core goal.