Government Efficiency at the IRS Is Undercut by DOGE and Trump

The long-term plan for an $80 billion infusion to improve the IRS fell apart in less than three years, when a new Congress clawed back more than half of the promised funding. Then the Department of Government Efficiency cut the IRS workforce by 11%, with even larger cuts reportedly still to come.

The supreme irony here is that those dedicated to “government efficiency” are leading the charge to make the IRS less efficient. In my field of economics, efficiency is synonymous with avoiding waste. This is consistent with DOGE’s rhetoric but squarely at odds with its actions.

The recent cuts will undermine efficiency by hamstringing capabilities in which Congress told the agency to invest in 2022: enforcing taxes on high-income individuals and complex businesses, as well as modernizing information technology and customer service. These areas were hit hard by budget cuts since 2010. By virtue of timing, DOGE cuts of probationary workers fell on many workers the IRS had just hired to improve enforcement and modernization.

To understand how modernizing customer service improves efficiency, consider that every year, US residents spend billions of hours and tens of billions of dollars filing tax returns. Research shows that about 45% of individual tax returns could be completed using data the IRS already collects from other sources, such as Form W-2 data from employers.

For others, the IRS knows everything that belongs on the tax return except for simple updates, such as whether someone got married or had a child. Making people tell the IRS what it already knows every filing season is wasteful. It is textbook inefficiency.

Our tax filing system is uniquely inefficient from an international perspective. In almost every developed country, tax authorities pre-fill tax returns with information they already have. Most individuals don’t file a return, or they file for free on the tax authority’s website. This is the goal of the new Direct File program, through which eligible individuals can do their taxes for free on irs.gov. Despite incomplete take-up and room for improvement in its design, the pilot of Direct File received positive feedback from 90% of users.

Instead of supporting and enhancing this effort to improve efficiency in tax filing, DOGE reportedly proposes to axe Direct File. The private companies that charge a fee to tell the IRS what it already knows will be delighted, having spent millions lobbying against Direct File. Fans of efficiency should be less thrilled.

DOGE’s own initiatives, for instance, replacing federal workers with AI chatbots, seem naive and unambitious by contrast. A company that offers a comprehensive suite of digital services might marginally improve efficiency by introducing AI chatbots, though market research suggests it could also frustrate consumers.

But the IRS doesn’t offer comprehensive digital services. It was supposed to develop them with the 2022 funding. They even planned to integrate AI into their services. You can’t put icing on a cake after you fire the baker.

As for tax enforcement, a recent study found that for every $1 the IRS spends auditing the top 0.1% of the income distribution, it recovers $6 from the audit. Post-audit improvements in compliance suggest an even larger return on investment, around $12 to $1. Cracking down on wealthy tax cheats seems like an extremely efficient use of resources. But the Global High Wealth unit, which specializes in comprehensive audits of wealthy Americans, lost 38% of its employees since Trump took office, leaving behind unfinished audits and a general state of chaos.

Rather than reducing taxpayers’ costs or fighting tax evasion, DOGE appears more interested in incorporating tax data into a surveillance apparatus and using this to deport millions of taxpaying undocumented workers.

The long-term effects of these developments are deeply troubling. The US is on the verge of a government debt crisis; we are arguably already in one. Policymakers seem keen to accelerate the crisis via deficit-expanding reforms. Debt crises are miserable. To stave off disaster, we must increase taxes or decrease public spending.

There is no panacea. A modernized tax system and a substantial, well-enforced tax on the rich would be a start, but this alone would be insufficient to fully address the problem.

Simply cutting the federal workforce to the bone won’t work either. Sacrifices will be required of everyday Americans via tax hikes and spending reductions or, if policymakers fail to act, the more painful and potentially catastrophic effects of inflation and recession.

DOGE’s cuts at the IRS worsen this problem by diminishing the government’s capacity to enforce taxes. Even more fundamentally, inefficient tax administration undermines public trust.

Empowering wealthy tax cheats while making tax filing miserable for everyday Americans will make the public unwilling to sacrifice to address our debt crisis. Worse, if we fall into economic calamity with a public that has no faith in its government, there is no telling how we will dig ourselves out.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Daniel Reck is an assistant professor of economics at the University of Maryland and a non-resident scholar at the Washington Center for Equitable Growth.

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