Musk, Ramaswamy Can Target Inefficiency by Closing the Tax Gap

Elon Musk and Vivek Ramaswamy’s government efficiency effort might well become a tool to boost federal revenue and operational effectiveness. And social media posts indicate the commission may be setting its sights on the IRS.

If the initiative intends to make the IRS more efficient, research and substantial evidence already support a path forward: Close the annual tax gap by hiring more staff to audit wealthy taxpayers. These reforms would require no new legislation, deliver proven results, and align perfectly with the commission’s purported mission of doing more with existing laws.

The tax gap sits at an estimated $696 billion annually, representing federal taxes that are owed, not paid, and could be collected through better enforcement. This shortfall amounts to nearly 35% of Musk’s ambitious $2 trillion efficiency target. Addressing the gap would boost federal coffers and level the playing field by ensuring the wealthiest taxpayers more proportionately meet their obligations.

Investing in audits of high-income earners is also one of the most efficient uses of government resources. A National Bureau of Economic Research analysis from 2023 indicates that audits of taxpayers in the 90th income percentile yield $12 for every $1 spent—a return on investment that will be difficult to match by inviting legions of bureaucrats to go line by line, cutting expenditures deemed unnecessary.

In addition to the immediate recovery of funds for relatively minimal outlay, creating an expectation of audits among high-income taxpayers would more effectively deter future evasion and reinforce compliance across the tax system. If efficiency is truly prized, rather than simply a pretext for cutting spending on social programs, targeted tax audits would be an ideal solution.

The first step to living within our means, as Musk has suggested, is to define those means. The tax code already sets out how much revenue should be collected, but the persistent tax gap reveals a glaring disconnect between what’s owed on paper and what’s being brought in.

This shortfall highlights a flaw that creates the illusion of scarcity of resources to allocate, and inaccurately portrays how the tax burden is distributed across income levels. For instance, the wisdom in raising the top tax bracket above 37%, or the corporate income rate higher than 21%, turns significantly on the extent that people are paying those effective rates.

Addressing the gap is a matter of efficiency, but it’s also a prerequisite for fiscal responsibility. Without reconciling the divide, discussions about the federal budget and spending priorities remain incomplete.

To ensure our government’s resources match its obligations, we need a complete picture of what resources we have. If the tax gap stems disproportionately from higher-income taxpayers, that would show that the intended effects of progressive tax rates are being negated.

Before embarking on any policy or spending reforms, we must confirm the existing framework functions in line with the code’s intent. There’s little logic in debating the nuances of tax rates or brackets if many of those who fall within them aren’t meeting their obligations. Evasion turns a nominally fair tax structure into a functionally regressive one.

Closing the tax gap would recover substantial revenue, restore confidence in the system’s fairness, and create a clear picture of what kind of government we can actually afford to maintain.

This isn’t speculation. The Inflation Reduction Act already demonstrated how targeted investments and increased funding enabled the IRS to recover more than $1 billion from high-net-worth individuals. This outcome proves that when the IRS has the resources to focus on high-income taxpayers, the results are rapid and significant.

To sustain and expand on these successes, the IRS needs more personnel. Years of budget cuts and workforce reductions have left the agency a shadow of its former self. In 1995, the IRS had 93,000 full-time employees. Despite an infusion of funding from the tax-and-climate law, the agency will likely be lucky to break 83,000 in 2025.

Auditing complex high-income returns is labor-intensive, but restoring and expanding the IRS workforce isn’t an obvious move to enhance efficiency. Recognizing the need to invest in the IRS to recover billions in unpaid taxes requires a nuanced and sophisticated understanding of tax administration.

That may prove antithetical to the oversimplified notion of slashing spending to achieve efficiency. There’s little indication that someone with minimal experience in government who claims he can identify $2 trillion in wasteful spending has the expertise necessary for such a task. True efficiency demands precision, not broad proclamations.

As Musk and Ramaswamy’s commission takes shape, the co-heads hopefully will seek out informed perspectives and resources that highlight the complexities and opportunities in effective tax administration. Its ostensible mission aligns perfectly with the need to close the tax gap and bolster the IRS’s capabilities in the process—we just have to hope the commission makes the right decisions.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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