[Senate Hearing 118-168]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 118-168

                  FAIRNESS AND FISCAL RESPONSIBILITY:
                      CRACKING DOWN ON WEALTHY TAX
                                 CHEATS

=======================================================================

                                HEARING

                               BEFORE THE

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION
                               __________

                            November 8, 2023
                               __________

             Printed for use of the Committee on the Budget
             
             
                  [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

                            www.govinfo.gov
                            
                               __________

                    U.S. GOVERNMENT PUBLISHING OFFICE
                    
54-122                    WASHINGTON : 2024  


                        COMMITTEE ON THE BUDGET

               SHELDON WHITEHOUSE, Rhode Island, Chairman
PATTY MURRAY, Washington             CHARLES E. GRASSLEY, Iowa
RON WYDEN, Oregon                    MIKE CRAPO, Idaho
DEBBIE STABENOW, Michigan            LINDSEY O. GRAHAM, South Carolina
BERNARD SANDERS, Vermont             RON JOHNSON, Wisconsin
MARK R. WARNER, Virginia             MITT ROMNEY, Utah
JEFF MERKLEY, Oregon                 ROGER MARSHALL, Kansas
TIM KAINE, Virginia                  MIKE BRAUN, Indiana
CHRIS VAN HOLLEN, Maryland           JOHN KENNEDY, Louisiana
BEN RAY LUJAN, New Mexico            RICK SCOTT, Florida
ALEX PADILLA, California             MIKE LEE, Utah

                   Dan Dudis, Majority Staff Director
        Kolan Davis, Republican Staff Director and Chief Counsel
                   Mallory B. Nersesian, Chief Clerk 
                  Alexander C. Scioscia, Hearing Clerk

                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, NOVEMBER 8, 2023
                OPENING STATEMENTS BY COMMITTEE MEMBERS

                                                                   Page
Senator Sheldon Whitehouse, Chairman.............................     1
    Prepared Statement...........................................    33
Senator Charles E. Grassley, Ranking Member......................     3
    Prepared Statement...........................................    35

                    STATEMENTS BY COMMITTEE MEMBERS

Senator Chris Van Hollen.........................................    14
Senator Mitt Romney..............................................    16
Senator Ron Johnson..............................................    18
Senator Jeff Merkley.............................................    20
Senator Mike Lee.................................................    21
Senator Tim Kaine................................................    23
Senator John Kennedy.............................................    25
Senator Mike Braun...............................................    27

                               WITNESSES

Dr. Natasha Sarin, Professor of Law and Finance, Yale Law School 
  & Yale School of Management....................................     6
    Prepared Statement...........................................    38
Dr. Nathaniel Hendren, Professor of Economics and Co-Founder of 
  Policy Impacts, Massachusetts Institute of Technology..........     7
    Prepared Statement...........................................    49
Mr. Chris Edwards, Kilts Family Chair in Fiscal Studies, Cato 
  Institute......................................................     9
    Prepared Statement...........................................    51

                                APPENDIX

Responses to post-hearing questions for the Record
    Dr. Sarin....................................................    60
    Dr. Hendren..................................................    68
    Mr. Edwards..................................................    69
Chart submitted by Chairman Sheldon Whitehouse...................    72
Chart submitted by Senator Ron Johnson...........................    73
Document submitted for the Record by Senator Tim Kaine...........    74

 
FAIRNESS AND FISCAL RESPONSIBILITY: CRACKING DOWN ON WEALTHY TAX CHEATS

                              ----------                              


                      WEDNESDAY, NOVEMBER 8, 2023

                                           Committee on the Budget,
                                                       U.S. Senate,
                                                    Washington, DC.
    The hearing was convened, pursuant to notice, at 10:02 
a.m., in the Dirksen Senate Office Building, Room SD-608, Hon. 
Sheldon Whitehouse, Chairman of the Committee, presiding.
    Present: Senators Whitehouse, Merkley, Kaine, Van Hollen, 
Padilla, Grassley, Johnson, Romney, Braun, Kennedy, R. Scott, 
and Lee.
    Also present: Democratic Staff: Dan Dudis, Majority Staff 
Director; Dan RuBoss, Senior Tax and Economic Advisor and 
Member Outreach Director; Sion Bell, Tax Policy Advisor.
    Republican Staff: Chris Conlin, Deputy Staff Director; 
Krisann Pearce, General Counsel; Nick Wyatt, Professional Staff 
Member; Ryan Flynn, Staff Assistant.
    Witnesses:
    Dr. Natasha Sarin, Professor of Law and Finance, Yale Law 
School & Yale School of Management
    Dr. Nathaniel Hendren, Professor of Economics and Co-
Founder of Policy Impacts, Massachusetts Institute of 
Technology
    Mr. Chris Edwards, Kilts Family Chair in Fiscal Studies, 
Cato Institute

          OPENING STATEMENT OF CHAIRMAN WHITEHOUSE \1\
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    \1\ Prepared statement of Chairman Whitehouse appears in the 
appendix on page 33.
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    Chairman Whitehouse. This hearing of the Senate Budget 
Committee will come to order. I appreciate very much our 
witnesses being here to discuss fairness and fiscal 
responsibility. How we crack down on wealthy tax cheats. As we 
know, most Americans follow the law and pay their taxes on time 
and in full.
    Many of the very wealthiest Americans, however, play by 
different rules. Empowered by a tax code that is rigged in 
their favor, they rob the public wheel of revenue, and leave 
everyone else to foot the bill. Today we will hear how the 
super wealthy account for a large, and disproportionate share 
of tax evasion, and cost the American people perhaps hundreds 
of billions of dollars every year.
    Despite rampant tax evasion by the wealthy and large 
corporations, years of budget cuts humbled the Internal Revenue 
Service (IRS) doing its job. Imagine having to audit a complex 
partnership network like this if you don't have the resources 
to do your job. Instead of meeting that need, cuts shrank the 
audit rate for millionaires by 80 percent. For the largest 
corporations the audit rate shrank by half.
    In the last year of the Trump Administration, people with 
incomes under $20,000 who claimed the earned income tax credit 
were twice as likely to be audited as someone making over a 
million dollars. Tax amnesty for the rich. Tax enforcement for 
the poor. This made no sense, and was undemocratic, and morally 
and fiscally wrong.
    So last year democrats provided an additional $80 billion 
of funding to the IRS over 10 years. Rhode Island's taxpayer 
advocate has already seen her case work speed up, as this new 
funding dissolved log jams at the agency. The IRS can at last 
pursue complex audits of the ultra-wealthy and giant 
corporations through their complex tax avoidance schemes, and 
it's good for revenue.
    The Congressional Budget Office (CBO) estimated that our 
$80 billion expenditure would result in $180 billion in 
additional revenue, a $100 billion increase. Yet, just two 
weeks ago House MAGA Republicans turned their Israeli funding 
supplemental into a scheme to reward wealthy political donors 
by slashing funding for tax enforcement.
    Of all the people they could have chosen to single out for 
special benefits, they chose wealthy tax cheats. That tells you 
a lot about their House priorities. The non-partisan 
Congressional Budget Office showed last week this wouldn't 
offset the Israel spending, it would double the cost of the 
measure, adding an additional $12.5 billion to the deficit.
    This should not be hard. Everyone should follow the law and 
pay what they owe, but they don't. The tax gap, the difference 
between taxes owed and taxes collected was $688 billion in 
2021, that's nearly half the size of last year's deficit. And 
that number is low. It doesn't fully count offshore tax 
evasion.
    Schemes involving webs of shell companies, evasion by big 
corporations and other techniques of tax cheating. One study 
found that the IRS estimate misses $160 billion in annual tax 
evasion, just by the top 1 percent. Even Trump IRS Commissioner 
Reddick said the gap could be as high as $1 trillion annually.
    Dr. Natasha Sarin, one of our witnesses today, estimates 
that the top 1 percent account for 30 percent of unpaid taxes. 
You heard that right, 1 percent of the population, 30 percent 
of the cheating. It should come as no surprise then, that 
auditing the wealthy delivers the biggest bang for the 
enforcement buck.
    As a famous bank robber once said, it's because that's 
where the money is. Dr. Nathan Hendren co-authored a recent 
study that found $1 spent auditing the wealthy generates $12 in 
revenue. For those at the very top, the top 0.1 percent, it may 
be as high as $36.
    $36 in revenue for every $1 spent on enforcement signals a 
lot of cheating. And it suggests that our Inflation Reduction 
Act (IRA) enforcement funding may reduce the deficit more than 
CBO originally estimated. $500 billion more over the next 
decade, according to Dr. Hendren. Let's be clear about one 
thing. The President has directed that the new funding will not 
be used to increase audits on anyone making less than $400,000.
    But if you're a multi-millionaire, hiding money in foreign 
bank accounts, or a multi-national giant, cheating through a 
web of tax haven subsidiaries, your tax amnesty days may be 
over. Regular taxpayers will see a fairer tax system, and 
better, quicker customer service.
    IRS phone service on its main help line during filing 
season was up to nearly 90 percent. Last year it was just 17 
percent. Wait times are down to just over 3 minutes. The 
national taxpayer advocate called the difference between this 
year and last year like night and day.
    On the enforcement side the IRS has already collected $160 
million from multi-millionaires who the IRS knew owe at least a 
quarter of a million dollars. One individual had to pay $15 
million after falsely deducting personal expenses as business 
expenses, including a 51,000 square foot mansion deducted as a 
business expense, fancy cars and artwork deducted as business 
expenses, and homes for his kids deducted as business expenses.
    Tell a plumber how somebody should get away with that from 
the IRS. Some business expenses. But without enforcement he'd 
get away with it, and he's not alone. An investigation by 
Chairman Wyden found nearly 1,000 taxpayers with incomes over 
$1 million that haven't even bothered to file their taxes.
    Fully funding IRS enforcement is both fair and fiscally 
responsible. If you care about debt and deficits you should 
want a well-funded, well-functioning IRS, and with that I turn 
it over to my distinguished Ranking Member, Senator Grassley.

           OPENING STATEMENT OF SENATOR GRASSLEY \2\
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    \2\ Prepared statement of Senator Grassley appears in the appendix 
on page 35.
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    Senator Grassley. Just to explain what might appear as 
rudeness to our witnesses, I'm going to have to give my opening 
statement, go to the Finance Committee and offer some 
amendments and then come back here and question you, so I just 
wanted to explain that to you.
    If someone were to base everything they know about IRS 
reform from what they hear today, they'd probably get the 
impression that it's a divisive and politically charged topic. 
A few years ago, however, IRS reform had strong bipartisan 
support. In June of 2019, the Taxpayers First Act passed the 
Senate by a voice vote on its way to be signed into law by 
President Trump.
    As then Chairman of the Senate Finance Committee, I'm proud 
to have had a hand in enacting legislation that had improving 
IRS customer service as its top priority. We accomplished this 
after continued years of reported abuse by the IRS.
    Now what's changed since just a little over 4 years ago? 
The so-called Inflation Reduction Act (IRA), jammed through 
Congress on a party line vote, reversed this course. Democrats 
abandoned the bipartisan focus on customer service in pursuit 
of partisan enforcement first efforts.
    Now you might get the idea that I like tax cheats. That 
would be wrong. When it comes to holding known tax cheats 
accountable, I'll take a back seat to no one, and so I'll refer 
to 2006 legislation that I authored, which improved the IRS 
Whistleblower Program by encouraging people with information 
about high tax dollar fraud to step forward.
    Now since the law was passed, we've brought in $6 billion 
into the federal treasury from these whistleblower's 
information, and it has the potential to collect tens of 
billion more from identified tax cheats. I've been trying to 
work with the IRS on this whole thing to get them to take this 
program more serious than they do.
    It takes some whistleblowers 10 to 11 years on average to 
get information back, what is the IRS doing with the 
information that they got. And obviously, that whistleblower is 
interested in that because they get a percentage of what is 
collected. So, efforts to paint one side of the aisle as 
friendly to tax avoidance, or tax evasion, ignores that 
taxpayers of all types attempt to minimize their tax liability 
in a legal way.
    Even wealthy President Biden routed income from books and 
speeches through S corporations to avoid Medicare taxes. The 
Earned Income Tax Credit that mostly benefits lower and middle 
income taxpayers costs billions of dollars in fraud every year. 
The overwhelming emphasis on tax enforcement taken by the 
Inflation Reduction Act will come at tremendous cost to the 
innocent small business owners and others caught in the IRS 
audit dragnet.
    You almost get the opinion listening to the debate in 
Congress and what you hear from the IRS and treasury people 
that everybody that's a small business owner is a tax cheat. My 
Democrat colleagues don't seem to care about the cost to small 
business. They're bewitched by the idea that the law created a 
magic money machine that will only extract dollars from the 
wealthy and large corporations, but their claims that those 
earning under $400,000 will be spared, that's simply hogwash 
from my point of view.
    The projected tax gap disproportionately consists of pass 
through businesses and sole proprietorships, which invariably 
puts a target on the back of small businesses. The IRS has said 
the $400,000 threshold will be based on what they call total, 
positive income. Now that's an extremely broad definition of 
income, that will capture many unsuspecting small businesses.
    Plus, a recent Treasury Inspector General report found that 
IRS lacks a uniform definition of a high income taxpayer, and 
IRS also has no plans to make such a definition. And the 
threshold isn't adjusted for inflation, so more and more 
taxpayers will get caught up in this every year.
    Now this reminds me of the debate going back to the 
alternative minimum tax that was set up in the 1960s. It wasn't 
indexed. It was supposed to hit a few hundred taxpayers that 
weren't paying enough tax, so let's get a little bit of them 
through the alternative minimum tax.
    It wasn't indexed. And finally, it covered millions and 
millions of middle-income taxpayers. Yet, the revenues 
Democrats are counting on may not even pan out. Even CBO notes 
in the fine print of their estimates that there's great 
uncertainty. In a letter to House Republicans last year, CBO 
says that it estimates the IRS will, ``Use all available 
productive approaches to increase revenues and raise 
voluntarily compliance from taxpayers with all amounts of 
income. In other words, people under $400,000 a year income.''
    This is a huge assumption, given scandals we read day to 
day. So you read less than a month ago an IRS contractor 
pleaded guilty to stealing the tax information of thousands of 
taxpayers, and even President Trump. The IRS doesn't deserve 
the presumption it's going to do the right thing all the time.
    Instead of throwing billions of dollars at the IRS 
enforcement, our constituents would much better be served by a 
customer service focus. I have a great deal of confidence in a 
position called Taxpayers Advocate within the IRS. Both Erin 
Collins, the current taxpayer advocate, and Nina Olsen, who 
previously held that role, have said customer service should be 
focused on more than enforcement, and that the best way to 
close the tax gap is to help taxpayers do the right thing. That 
reminds me of the 1998 IRS Reform Commission that I was able to 
be a member of, and they said just give the taxpayers the 
information that they need when they ask a question, answer the 
phone with a real person, and give them the right answer. 
That's the best way to get the taxpayers to pay the right 
amount of money.
    The IRA also doesn't include the sort of robust oversight 
and deliberations that was part of earlier attempts to reform 
the IRS. To accomplish this sort of oversight we should enact 
the IRS Funding Accountability Act, which I've led with Senator 
Thune. This legislation would put a pause on new enforcement 
funding until the IRS provided detailed plans for how that $80 
billion is going to be spent.
    Right now, none of us know how these dollars are being 
spent by the IRS. Congress would then have the opportunity to 
review IRS's spending plans and reject them if not up to snuff. 
We all want to tax cheats to be held accountable, however, we 
must first help the majority of taxpayers who want to do the 
right thing.
    Let's resist the siren call of the magic money machine, and 
put taxpayer services first. That's the way to get the tax 
money coming in. Let's return to bipartisanship. We had a 
little over 4 years ago. Thank you, Mr. Chairman.
    Chairman Whitehouse. Thank you, Ranking Member Grassley. 
Let me turn now to our witnesses. First let me welcome Dr. 
Natasha Sarin, who is an Associate Professor of Law at Yale Law 
School with a secondary appointment at the Yale School of 
Management in the Finance Department. She previously served as 
Deputy Assistant Secretary for Economic Policy and later as a 
counselor to Treasury Secretary Janet Yellen at the United 
States Treasury Department.
    After her, we will hear Dr. Nathaniel Hendren, who is 
Professor Economics at the Massachusetts Institute of 
Technology (MIT). He is a founder and co-director of Policy 
Impacts, an organization dedicated to evidence-based policy 
making. He is also a founder and co-director of Opportunity 
Insights, which is dedicated to identifying barriers to 
economic opportunity and alleviating poverty.
    Last, we are joined by Chris Edwards, who occupies the 
Kilts Chair in Fiscal Studies at the Cato Institute. 
Previously, he was an economist on the Congressional Joint 
Economic Committee, and Tax Manager at PricewaterhouseCoopers 
International Limited (PwC). Dr. Sarin, please proceed, and 
welcome.

 STATEMENT OF DR. NATASHA SARIN, PROFESSOR OF LAW AND FINANCE, 
        YALE LAW SCHOOL & YALE SCHOOL OF MANAGEMENT \3\
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    \3\ Prepared statement of Dr. Sarin appears in the appendix on page 
38.
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    Dr. Sarin. Chairman Whitehouse, Ranking Member Grassley, 
Members of the Committee. Thank you for inviting me to share my 
views on the importance of adequately funding the Internal 
Revenue Service. Before the Inflation Reduction Act's historic 
investment in the IRS, the agency could not afford to serve 
taxpayers, and hadn't modernized tax processing in the last 
half century.
    Returns were literally transcribed by hand. It's been 
remarkable to see what a difference just a year makes. The IRS 
achieved an 87 percent level of service last year. The IRS 
served 100,000 more taxpayers in person. And it is gearing up 
to pilot a direct e-file program to save taxpayers the hundreds 
of dollars each year they spend on tax preparation.
    Alongside its service investments, the IRS is prioritizing 
high-end enforcement efforts. And in my testimony today I would 
like to make four points about the importance of this work. 
First, adequately funding the IRS is critical to our fiscal 
sustainability. The IRS's most recent tax gap estimate suggests 
that more than $600 billion in owed taxes are uncollected each 
year.
    It is difficult to appreciate how significant a loss to the 
fisc that represents. So, come comparisons may be helpful. One 
year's worth of uncollected taxes totals nearly 3 percent of 
gross domestic product (GDP). One year's worth of uncollected 
taxes would have covered an extension of the expanded Child Tax 
Credit, lifting millions of children out of poverty through 
2025.
    One year's worth of uncollected taxes would shrink our 
annual budget deficits by nearly half. Second, adequately 
funding the IRS is critical to creating a fair economy. My past 
work has shown that the top 1 percent is responsible for around 
30 percent of the tax gap. That's more than $2 trillion over 10 
years.
    And yet, as the IRS was gutted in the last decade or so, 
its capacity to pursue this high-end evasion diminished most. 
Audit rates of individuals making $10 million or more annually 
declined by 80 percent. Over just a few years more than 1 
million high income evaders failed to file returns at all, and 
in doing so cost the fisc $66 billion.
    The IRA investments are focused on reversing these trends, 
and they are already succeeding. In the last 9 months the IRS 
collected hundreds of millions of dollars in back taxes from 
millionaires. And the agency has already logged progress with 
respect to large corporatization.
    To take one important example the IRS recently concluded 
that Microsoft owes nearly $30 billion in back taxes. 
Historically these types of cases against large, highly 
profitable corporations have been few and far between because 
of the resources and time that they require.
    Thanks to the IRA the scales have finally been tilted some 
in the IRS's favor. Third, recissions of IRA funds will add 
meaningfully to the deficit because they will limit the 
agency's capacity to pursue this high-end evasion. Former 
Assistant Secretary for Tax Policy, Mark Mazur and I recently 
estimated that this summer's agreement to rescind more than $20 
billion of new IRA funding will increase deficits by around 
$300 billion over the course of the next decade.
    And an additional $14 billion rescission, as was proposed 
last week would add well over $100 billion to the deficit. More 
broadly, the idea of defunding the IRS as a pay for or an 
offset, is fundamentally backwards. We can debate magnitudes, 
but we cannot debate the following fact.
    Adequately funding the tax administrator is a deficit 
reducing measure that pays for itself many times over. Fourth, 
clawing back IRA funds, or lowering the IRS's discretionary 
appropriations will also harm the American people by decreasing 
the service that they receive.
    Taxpayer service and compliance are flip sides of the same 
coin. Answering taxpayer questions and helping to resolve 
compliance issues early in the filing process, well before an 
audit, are critical components to providing better service to 
taxpayers. These improvements also mean that voluntary 
compliance will rise, and so the tax gap will shrink.
    Through its recent investments in the IRS, Congress has 
meaningfully improved our fiscal future and the functioning of 
our tax system. Rather than be depleted, these investments 
should be preserved and supplemented. That requires maintaining 
and growing IRS discretionary funding, and in the coming years 
reversing recent cuts to its mandatory funding.
    The American people are already benefitting from the 
agency's monumental progress. Adequate funding will ensure that 
they continue to benefit in the future. Thank you.
    Chairman Whitehouse. Thank you very much, Dr. Sarin. We 
will now hear from Dr. Hendren.

STATEMENT OF DR. NATHANIEL HENDREN, PROFESSOR OF ECONOMICS AND 
   CO-FOUNDER OF POLICY IMPACTS, MASSACHUSETTS INSTITUTE OF 
                         TECHNOLOGY \4\
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    \4\ Prepared statement of Dr. Hendren appears in the appendix on 
page 49.
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    Dr. Hendren. Thank you. So, thank you for the opportunity 
to speak with you all today. My name is Nathan Hendren. I'm a 
co-founder of Policy Impacts, an organization based at MIT that 
seeks to improve the quality of government decision making, 
using high-quality evidence on both the costs and the benefits 
of potential policy changes.
    I sit here not with the goal of advocating for any 
particular policy, but sharing what I believe to be the best 
evidence of the costs and the benefits of those policies. In 
June of this year our research team, which includes Will 
Boning, Ellen Stuart, and Ben Sprung-Keyser, released a 
comprehensive analysis of the returns to IRS audits of 
taxpayers across the income distribution.
    We studied the costs of conducting each in person audit in 
the United States (U.S.), and the revenues associated with 
those audits for the universe of IRS audits going back to 2010. 
For each audit we produced a comprehensive measure of the costs 
of that audit from internal IRS accounting information, as well 
as detailed activity logs, which record the enforcement 
activities of all IRS auditors.
    These costs include all stages of the audit, including the 
initial exams, any subsequent appeals, and collection stages of 
the audit. And they include not just the direct costs of the 
audit, and the auditor's time, but a comprehensive accounting 
of all non-labor costs, including the management costs, 
training, computing, travel, building, rent, et cetera.
    Now in addition to costs, we also estimate a comprehensive 
measure of the revenues generated from each audit, and this 
includes both the upfront revenue generated from that audit, 
and also the effects of the audit on future tax revenue paid by 
audited individuals, i.e. the future deterrence effects of 
those audits.
    Ultimately, our paper estimates that marginal expenditures 
on in person audits directly towards top-earning taxpayers, so 
those above the 90th percentile of the income distribution, are 
likely to return at least $12 in revenue for each $1 of costs. 
In contrast, audits of individuals with below median income 
deliver around $5 for each $1 in costs.
    Importantly, a large portion of this increased revenue 
comes through the impact that audits have on future taxpayer 
behavior. For every $1 that the IRS collects in initial upfront 
revenue, there's an additional $3 in revenue that comes in in 
the future from the changes in that taxpayer's behavior, likely 
because they learn during the audit, about their actual tax 
liabilities.
    Our work also studies whether expanded enforcement 
activities would face diminishing returns. We do this by 
analyzing a large decline in audit rates between 2010 and 2014 
tax years. We show that when the IRS heavily cut back on 
audits, the rate of return on IRS expenditures did not change, 
and so while ramping up IRS enforcement back to 2010 levels 
might include additional upfront costs, such as training new 
auditors.
    Our result suggested if the IRS expands its audit rates 
back to the 2010 levels, we would expect roughly the same rate 
of return on IRS audits, and broadly in line with our 
estimates. I should note our estimates are larger than what has 
been estimated in previous literature, and the estimates that 
led to the CBO's scoring of the expanded IRS enforcement in the 
Inflation Reduction Act.
    The CBO has suggested that expanded IRS enforcement in the 
IRA would deliver roughly $180 billion in revenue off of $46 
billion in enforcement costs, for a ratio of about 3.9. Our 
results suggest that the true return on the spending could be 
as much as three times higher.
    The primary difference in our estimates is that the CBO has 
been reluctant to include estimates of deterrence effects in 
their forecasts, noting that the magnitude of these effects is 
highly uncertain. We believe that our estimates address this 
uncertainty, and show that across a broad range of years and 
types of taxpayers, roughly three times more revenue is 
collected from a taxpayer after the upfront audit, after the 
upfront revenue that they pay during their audit.
    Applying our estimates to the IRA suggests net revenues 
closer to the $500 billion range. We also considered the 
implications of our results for the efficiency of raising 
revenue through audits. The high return per dollar spent 
suggests that the dead weight loss associated with expanded 
enforcement activities is relatively low, relative to the 
revenue it has raised. This suggests that in addition to the 
equity concerns of ensuring compliance with the tax code, 
increasing audit enforcement is a relatively efficient way of 
raising revenue.
    And so to sum up, our analysis shows much greater returns 
to IRS audits than previously estimated, particularly for the 
highest earners, and we found no evidence that marginal returns 
would be diminished if the IRS expanded enforcement back to the 
2010 levels. Thank you.
    Chairman Whitehouse. Dr. Hendren, thank you very much. Mr. 
Edwards, over to you.

   STATEMENT OF CHRIS EDWARDS, KILTS FAMILY CHAIR IN FISCAL 
                  STUDIES, CATO INSTITUTE \5\
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    \5\ Prepared statement of Mr. Edwards appears in the appendix on 
page 51.
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    Mr. Edwards. Thank you very much. Thank you for inviting me 
to testify. A huge debt arising, interest rates are generating 
a federal budget crisis, all new spending should be offset by 
cuts in my view. However, reducing the President's increased 
IRS enforcement doesn't work as an offset because enforcement 
may modestly increase revenue, so I agree with the Chairman 
about that.
    That said, I support rescinding the increased IRS 
enforcement because there are much better ways to boost tax 
compliance, including improving IRS customer service and 
simplifying the tax code. President Biden's budget would triple 
IRS enforcement spending by 2033.
    I think that's a great overkill. The National Taxpayer 
Advocate said in April that IRS funding is ``disproportionately 
allocated for enforcing activities. Congress should reallocate 
IRS funding to achieve a better balance with taxpayer service 
needs and information technology (IT) modernization.''
    Similarly. The recent IRS strategic plan heavily stressed 
customer service and technology upgrades. Those two reforms 
would be win/win for taxpayers and the government. By contrast, 
enforcement is always a win/lose because enforcement creates 
collateral damage. That is higher compliance costs, and more 
headaches for law abiding taxpayers.
    And that's because the IRS makes a lot of mistakes. 
Consider disputes that end up in Federal Tax Court. In recent 
years the IRS only received 48 percent of the dollars that it 
claimed in court. It was only right half of the time. 
Similarly, more than 40 percent of IRS audits of partnerships 
result in no recommended changes, and for individuals at the 
top end, above $5 million, almost 40 percent of audits result 
in no change.
    Those are really high shares of targeted taxpayers who did 
nothing wrong, so that's collateral damage. The IRS needs to 
enforce, but we have to remember that enforcement does impose 
higher costs on families and businesses who pay the correct 
amount. So, enforcement is a blunt and inaccurate tool.
    In October, the IRS released a new estimate of the tax gap, 
the gross gap for 2021 is $688 billion. That's 2.9 percent of 
GDP. Well that estimate of the tax gap is actually similar as a 
percent of GDP as previous estimates, going back at least two 
decades.
    So the official tax gap shows that taxpayer errors and 
cheating have not increased as a share of the economy. A number 
of studies have compared tax gaps across countries. They show 
that the U.S. tax gap is about the same size or smaller as tax 
gaps that are typical in Europe. I think the data show that 
Americans are relatively law abiding on their taxes.
    That said, there are three better ways to boost tax 
compliance than jacking up enforcement. First, keep tax rates 
low. Let's look at corporate taxes. The average statutory 
corporate tax rate has remarkedly dropped in half since the 
1980s around 48 percent to 24 percent across the Organisation 
for Economic Cooperation and Development (OECD) countries.
    But while the rate has gone down, corporate tax revenues 
across the OECD as a share of GDP have actually risen, which is 
remarkable. With lower rates there's less incentive to avoid 
and evade.
    Second, we have to improve IRS customer services. The 
National Taxpayer Advocate said, ``the most efficient way to 
improve compliance is by encouraging and helping taxpayers do 
the right thing on the front end. That is much cheaper and more 
effective than trying to audit our way out of the tax gap.''
    Third, Congress should simplify the tax code. Rising 
complexity invites abuse and makes IRS administration much more 
difficult. The Government Accountability Office (GAO) took a 
look at IRS enforcement in a detailed study last year, and they 
found that for all returns over $200,000 the average IRS audit 
hours per return has doubled, which is a remarkable statistic.
    The code has become so complex that agents are spending 
twice as many hours auditing each return. All the complex 
energy tax breaks in the IRA legislation will encourage abuse, 
and it will cost the IRS billions of dollars to administer. The 
projected cost of the IRA energy breaks has ballooned from $390 
billion to around $1 trillion by various estimates, so a good 
offset for any new spending in my view, would be to cut these 
huge subsidies.
    So, in sum, IRS data in my view, show that the tax gap is 
stable as a percent of GDP. The U.S. tax gap is no higher than 
countries in Europe. I would say something about it's true that 
the top 1 percent are the source of 30 percent of the cheating 
or error. That is true. The GAO data supports that, but the top 
1 percent pay 42 percent of all income taxes, so that's--it's 
not surprising.
    We can reduce the tax gap by cutting tax rates, improving 
IRS customer service, and simplifying the tax code. Thanks very 
much.
    Chairman Whitehouse. Thanks. I think Mr. Edwards, you said 
at the beginning of your testimony that the House IRS 
enforcement cuts won't help reduce the deficit, and I think all 
three witnesses agree on that. Can I just see if that's, we're 
agreed? Did I paraphrase you correctly?
    Mr. Edwards. That's right. That's what the CBO shows.
    Chairman Whitehouse. All three agree there. Dr. Sarin, 
let's talk about customer service first. You say that an 87 
percent level of service took place this past filing season, up 
from an 18 percent level of service in 2022. What do you mean 
by level of service?
    Dr. Sarin. So, that's a statistic about the level of 
telephone service, so the number of phone calls that get 
answered. And just for some context, in the 2 years leading up 
to the Inflation Reduction Act, over 500 million calls were 
placed to the IRS, and only 13 percent of those calls were ever 
answered. And compared that to the progress with just 1 year of 
Inflation Reduction Act funding, where now only 13 percent of 
calls are unanswered, and I suspect that number will go down in 
the future.
    Chairman Whitehouse. Yeah. The wait time dropped 
commensurably.
    Dr. Sarin. The wait times dropped by 85 percent, and they 
now average 4 minutes.
    Chairman Whitehouse. So, let's talk now about the tax gap, 
which the IRS says is $688 billion, which is a pretty big 
number. But they also concede that that $688 billion tax gap is 
an under estimate of what the real tax loss is. What are the 
tax evasion devices that are not contemplated in the $688 
billion that make it a bigger number in reality than that?
    Dr. Sarin. So, the challenge really from the IRS's 
perspective, which as you point out Chairman Whitehouse, they 
acknowledge every time they measure the tax gap, is you can 
really only measure what you can see. And from the agency's 
perspective they do a pretty good job of measuring the 
individual income tax gap, but they have no real capacity to 
measure the corporate income tax gap, the partnership tax gap, 
the digital assets tax gap, and that's why former Commissioner 
Rettig speculated that the tax gap could be as high as $1 
trillion dollars a year.
    That's a number that Larry Summers has actually pointed to 
as well. The challenge from the IRS's perspective, and part of 
why these resources are so critically important is they're 
going to enable the IRS to capture those types, and measure 
those types of evasion that are happening disproportionately at 
the very top of the distribution, through things like 
partnerships, or through things like offshore bank accounts 
that today the agency just isn't able to see.
    And there's an academic estimate by Gabriele Zucman, Daniel 
Rack and some co-authors at the IRS that suggest that the tax 
gap is under measured by around 10 percent, and that the 
distribution of the tax gap is more heavily concentrated 
towards the top 1 percent, who are actually responsible for 
closer to 40 percent of the tax gap, when you take into account 
these under estimates.
    Chairman Whitehouse. So, let's take a look at the diagram 
that I put up earlier that shows as I understand it, this is an 
actual diagram of a complex partnership, anonymized.\6\ We 
don't know which one it is, that the IRS provided to the GAO as 
an illustration of the kind of complexity that is deployed by 
very wealthy individuals in order to avoid taxes.
---------------------------------------------------------------------------
    \6\ Chart submitted by Chairman Whitehouse appears in the appendix 
on page 72.
---------------------------------------------------------------------------
    This is, as I understand it, an outline of a single entity.
    Dr. Sarin. A single partnership, that's what it looks like.
    Chairman Whitehouse. Multiple, every little dot is a 
separate corporate entity that can provide its own taxes.
    Dr. Sarin. That's exactly right. And just for----
    Chairman Whitehouse. And how might a tangle of shell 
companies like this facilitate tax evasion, and is there real 
concern that auditing something like this will create more 
headaches for the people who put so many headaches, and so much 
money into crafting a scheme like this?
    Dr. Sarin. So, I think there's a lot of pieces here that 
are really important to unpack, Chairman Whitehouse, and thank 
you for raising them. Pass throughs are taxed, not at the 
entity level, but at the individual level. So from the IRS's 
perspective, what they have to do with the complex partnership 
like this is peel it back like an onion.
    You have partnerships who own partnerships who are owned by 
foreign entities, who then somewhere down the line, or somehow 
there is individual income tax liability that sits in a 
structure like that. And for the past decade or so, what you've 
had when you had a structure like that, and the IRS initiated 
an audit, was you had something like a single revenue agent at 
the IRS, trying to figure out what was going on there.
    And actually, this is a point that's important to raise 
with respect to what Mr. Edwards just said about no change 
rates for large, complex partnerships. The no change rates, and 
GAO pointed this out in their report as well, are a result of 
the fact that all the compliance issues that are posed by a 
structure like this.
    The fact that partnerships are able to shift income and 
gains and losses throughout partners, in ways that hide income 
from the IRS, and ultimately evade their tax liability, are 
just incredibly difficult to unpack without the right team of 
experts spending time on this type of work.
    Chairman Whitehouse. And quickly, Mr. Hendren, because my 
time has expired, your point is that once you've correctly 
audited a massive scheme like this, the revenue correction that 
comes will persist through time, not just in the tax year, and 
that we should do a better job of counting the future revenues 
that come once an entity like this is audited. It's not going 
to go back and file the same thing once it's been caught, 
correct?
    Dr. Hendren. Yeah, that's right. So, what we see is that 
when you audit an individual, a small business owner, that you 
roughly pick up an additional $3 relative to the initial $1 
that you pick up.
    Chairman Whitehouse. And something like this could be a 
multiple of that?
    Dr. Hendren. That would be one way in which a business 
owner, or in an extreme way, a business owner would be evading 
taxes. That's right.
    Chairman Whitehouse. Senator Grassley, over to you.
    Senator Grassley. Mr. Edwards, let's go to that $80 billion 
in Inflation Reduction Act funding. The proponents of this 
funding tout this funding as necessary to increase taxpayer 
services. That being the case, only $3.2 billion of that 
funding was dedicated to taxpayer support. Would the lopsided 
nature of the IRS funding create a taxpayer service funding 
cliff with customer service money running dry before 
enforcement funding?
    Mr. Edwards. Yeah. That's a very good question. In fact, if 
you look at President Biden's budget from earlier this year 
that includes the IRA money as well as the discretionary IRS 
budget, they've got taxpayer services and technology upgrades, 
sort of increasing for a year or two, and then dropping, which 
makes absolutely no sense.
    I mean on the technology upgrades I think we all favor, you 
know, major IRS technology upgrades. There's obviously going to 
be an increased demand in the future for those upgrades, so I 
think there ought to be either, should be a bipartisan 
compromise here to at least move the IRS extra enforcement 
money back to customer service, and IT upgrades.
    Again, I think that's a win/win whereas enforcement is 
always a win/lose for the economy it seems to me.
    Senator Grassley. I've heard liberal pundits claim that 
anyone who's not a tax cheat has nothing to worry about from 
increased IRS enforcement. Mr. Edwards, this is they say even 
if an audit results in no additional tax due, a taxpayer can 
spend countless hours, incur significant costs, and experience 
what you referred to as collateral damage in an audit that 
finds no wrongdoing.
    Can you discuss the cost and burden an IRS audit imposes on 
even innocent taxpayers?
    Mr. Edwards. The way I look at IRS auditing and enforcement 
is that it's a leaky budget. It's not just you don't just add, 
hire more IRS agents and get a big return for the government. 
There is many misses as we discussed. There's many returns that 
where there's no change, so you subjected businesses to massive 
headaches and extra time hiring accountants, and there's no 
change.
    The IRS loses half the time in tax court, and even when you 
know, even when there's a study I cite in my testimony that IRS 
auditing actually is an interesting study where it causes more 
businesses to go bankrupt after they are audited. And some of 
those, you know, businesses are cheating for sure.
    But there is this collateral damage. There's negative, as 
an economist would say, deadweight loss to the economy from the 
increased enforcement.
    Senator Grassley. Let's look at this tax gap, Mr. Edwards, 
of $625 billion. We've heard from some who believe the tax gap 
is substantially greater, and that the IRS estimates are below 
the true number. However, there are reasons to believe that the 
IRS tax gap estimate may be overstated, even though IRS loses 
nearly half the time at tax court, as you just said.
    The IRS's methodology for measuring the tax gap includes 
upward adjustments that are recommended by frontline examiners, 
but reversed by administrative appeal or judicial review. 
Doesn't this suggest that the tax gap, which Democrats have 
used to justify increase in enforcement may be overstated?
    Mr. Edwards. I think that's right. I think that, you know, 
I've read Professor Sarin's work. It's excellent, it's very 
interesting, but the IRS just came out with a new tax gap 
report last month, and it says our tax gap is about the same as 
it's been for decades as a share of GDP.
    I think the IRS uses a very good methodology. They start 
with something called the national research program, which is 
this broad measure of random auditing. Then they take the 
unreported income there, and they multiple by three to get a 
picture of the universe of the errors and cheating. And I think 
that's a pretty good methodology, and I think, you know, the 
IRS tax gap measure is pretty good.
    Senator Grassley. Let's look at what you call the leaky 
bucket. According to a 2022 GAO report, in 2021 all audits on 
individuals with incomes of $200,000 and above, led only to 
recommended additional tax of around $2.2 billion. In the same 
report, CBO says they, ``found that the IRS collected about 47 
percent of all recommended additional taxes from individual tax 
payer audits.''
    Based on this, does it seem plausible that the IRS will be 
able to collect an additional $180 billion, $440 billion, or 
even $1 trillion in additional revenue from high income 
taxpayers?
    Mr. Edwards. You refer to a GAO report that came out in 
2022 that looked at IRS auditing. I think it's an excellent 
report that your staff, and the members should take a look at. 
In 2021, IRS--the IRS audits, they recommended just $2 billion 
on all the audits above $400,000. So even if you say quadrupled 
IRS auditing at the top end, maybe the IRS would gain another 
$10 billion or so, maybe $20 billion.
    But you know, the deficit now is $2 trillion, so you could 
quadruple the IRS auditing that would, you know, you would 
reduce the deficit by maybe 1 percent. So, you know, 
enforcement like I said, it's a leaky bucket. It's not an 
automatic sort of money machine. I think there's better ways to 
increase compliance.
    Chairman Whitehouse. Let me turn now to a colleague who has 
been an ardent voice, not only for a fairer tax code, but for 
fairer tax enforcement. That is Senator Van Hollen, who will be 
followed by Senator Romney.

                STATEMENT OF SENATOR VAN HOLLEN

    Senator Van Hollen. Thank you, Mr. Chairman. Thank all of 
you for your testimony today. I just want to make sure I 
understood an answer you all gave to Senator Whitehouse 
earlier, which is you all agree that better tax enforcement 
will reduce the deficit, just a yes or no if you could.
    Dr. Sarin. Absolutely.
    Dr. Hendren. Yes.
    Mr. Edwards. Slightly, yes.
    Senator Van Hollen. Slightly yes. So, I want to raise this 
issue in the context of the current debate because the House of 
Representatives just passed legislation to provide assistance 
to Israel, which I support, and they said they were going to 
offset that $14 billion cost by cutting $14 billion from the 
IRS. Now, all of you would agree, would you not, that that 
would increase not decrease the deficit?
    Dr. Sarin. It's correct, and that's also CBO's conclusion.
    Dr. Hendren. Yes.
    Mr. Edwards. Slightly, yes, but again I think the problem 
is the----
    Senator Van Hollen. Slightly yes, and yes and yes. And in 
fact, you know, we've mentioned the IRS figures earlier Mr. 
Edwards, and said you thought they had good figures. I don't 
know if you agree with this, but they found that actually that 
$14 billion cut would lose $90 billion to the taxpayer, as Dr. 
Sarin pointed out.
    Even CBO says it's in the range of I think they said $14 
billion. But the bottom line is this. No matter how you cut it, 
it is misleading at best, and dishonest at worst, is it not? To 
claim that that is covering the $14 billion costs in the House 
bill?
    Dr. Sarin. That is correct.
    Dr. Hendren. All the way across? Yeah. I think it's going 
to cost more than $100 billion.
    Mr. Edwards. Yeah. I think they ought to offset the Israel 
spending with other spending cuts.
    Senator Van Hollen. Right. I mean so that's another way of 
saying it just doesn't compute, right? And so, what we're 
seeing here is a game by House Republicans, even acknowledged 
by Congressman David Schweikert from Arizona, and I'm going to 
quote him saying, ``I think it was intellectually lazy. I care 
about the debt,'' he went on to say, ``and at the same time 
move something as your pay-for that actually will have a 
multiplier of raising the debt.''
    Clearly that's misleading. And I just find these budget 
games that are played by too many people around here, to really 
undermine the argument around the budget issues. Let me ask 
you, Dr. Hendren, sorry, if you could, and I know you've spoken 
to this in your testimony. Just quantify what you think the 
current tax gap is, and the extent to which by targeting very 
wealthy, very wealthy taxpayers who are not paying the taxes 
already due and owing, can help reduce the deficit.
    Dr. Hendren. Sure. So, as Natasha was saying as well, it's 
very difficult to measure what you don't see. And so the IRS 
faces an enormous difficulty when they try to measure the tax 
gap. Our work took a different approach, which is to start with 
the actual audits that have taken place over the past decade in 
the United States, and study how much revenue you actually get 
from those audits, both the upfront revenue that you get, and 
the future deterrence revenue that you get from those audited 
individuals over time.
    That suggests to us that for every $1 that you spend in the 
audit you get back about $12 over the long run.
    Senator Van Hollen. And that's by targeting primarily on 
wealthy taxpayers?
    Dr. Hendren. Sorry, that's just it gets focused on those in 
the top 10 percent of the income distribution, and as Senator 
Whitehouse was referring to, we do find higher estimates as you 
go up into the top regions, very top of the income 
distribution.
    Senator Van Hollen. Right. Dr. Sarin, do you agree with 
that analysis?
    Dr. Sarin. Entirely, and in fact Dr. Hendren's work is a 
good, sort of illustration of the potential of what the IRS is 
actually doing today because they've committed not to using 
these new dollars on anyone under $400,000. All of their 
enforcement work is concentrated on the high end, which as Dr. 
Hendren speaks to, has a return of at least 12 to 1 and maybe 
more than that.
    Senator Van Hollen. Well thank you for that, and it does 
constantly amaze me how some of our colleagues are opposed to 
trying to collect taxes that are already due and owing. We're 
not talking here about increasing the tax rates. We're talking 
about collecting monies already legally due and owing.
    And our colleagues want to handcuff the IRS, and prevent 
them from collecting those monies from very wealthy taxpayers 
and that reduces--that obviously increases the deficit when you 
deny the IRS those funds, something you all agreed is true. 
Thank you, Mr. Chairman.
    Chairman Whitehouse. Thanks, Senator Van Hollen.
    Senator Romney.

                  STATEMENT OF SENATOR ROMNEY

    Senator Romney. I agree with much of what Senator Van 
Hollen has just described. I come away feeling that there ought 
to be a pox in both our houses, both Republican and Democrat 
houses. There's a quote I love, by I think it's H.L. Mencken, 
who said ``for every complex problem there's an answer that's 
simple, clear, and wrong.''
    And the idea that somehow we should reduce the number of 
audits, and the number of IRS agents, and that's going to make 
us more money is simple, clear, and wrong. It's a Democrat, 
excuse me demagogue approach, which is I think designed to say 
hey, we want to get people to vote for us because we're going 
to promise them they can cheat in their taxes because there 
won't be any audits.
    I mean it's just disingenuous. At the same time I'd note I 
saw the Chairman's chart with all these lines of all this 
complexity. I can assure you as someone that's been involved in 
an entity that probably looks similar to that, that's not 
designed to save taxes, or to cheat on taxes, it's just the 
reality of what happens if you are making multiple investments.
    Let's presume for instance, you're an entity that buys 
houses. You buy homes, and you're going to rent them to people, 
and then ultimately sell them. And you bought 1,000 homes. Each 
home would represent a different line on a chart. They're 
purchased at different prices. Perhaps different investors 
joined you to buy different ones of those homes. Maybe there 
was a foreign investor involved.
    Maybe there was a not for profit involved, so each of them 
has to get their own, if you will, tax form with what the 
income is, what the expenses are, what the taxes are, that's 
the complication of investments made by entities that are 
making lots of different investments in lots of different 
places.
    Now, I recognize as well, that a lot of those machinations 
that go on in the corporate world, in particular, are done to 
minimize taxes, but to do so in conforming with the laws we've 
written. It's not that they're trying to cheat, it's that 
they're trying to follow every possible avenue to keep their 
taxes as low as possible.
    So, I'm one of those who believes very deeply in carrying 
out audits, hiring enough IRS agents that we're actually 
getting as much revenue back as we possibly can. I would also 
strongly believe that putting in place systems makes a lot of 
sense. I would note that with regards to your research, being 
able to have people call the IRS makes a lot of sense, although 
the calls are overwhelmingly going to be people of modest 
income.
    People of high income--I mean I remember when I was a 
student. I was calling the IRS to get advice on a number of 
things, but as I became far more financially well off, I talked 
to the accounting firm that I worked with, 
PricewaterhouseCoopers, and they were the ones that were doing 
these kinds of machinations, and I did not make any more calls 
to the IRS because my questions were too complex for someone 
that would be answering the phone at the IRS to likely have an 
answer.
    I guess I'm going to turn to a different thing because we 
all--my opinion, I agree with all of you here, which is we 
ought to have more people doing audits, and that's going to 
generate more money for the Federal Government. And I think 
it's nuts to somehow think that getting rid of auditors is 
going to save us money.
    Getting rid of auditors is going to cost us money. We ought 
to have enough auditors to get as much revenue and compliance 
as makes economic sense. I don't know what the right number is. 
I'm not sure I'd start off with 80 billion, but I'd start off 
with more auditors and see how it goes.
    Let me turn to a different topic entirely, and that is we 
understand that raising taxes on people slows growth of our 
economy. And so, there's a tradeoff, but we also see we've got 
a $1.7 trillion deficit.
    And so, where are there places where you look at the tax 
code and say you know what? This is a place where we could 
generate more money and not slow growth. Are there places that, 
and I'll turn to the representative from the Cato Institute, 
are there things we could do to generate more tax revenue? And 
by the way, I don't go with the idea if we just cut revenue 
more we'll, or cut taxes more, we'll get more revenue.
    Because taking taxes to zero is not going to get us more 
revenue, so there's a point at which you don't keep cutting and 
get more revenue. But are there places that we should be 
looking to get additional revenue in our tax code?
    Mr. Edwards. Yeah. Absolutely. I mean I mentioned in my 
testimony, in my written testimony that, you know, the energy 
tax cuts or breaks in the IRA legislation originally scored a 
390 billion. Now it looks like they're going to cost $1 
trillion. I think there ought to be a compromise there, to at 
least cut those breaks back to what the original score was.
    I propose over the years that we ought to cut back on the 
municipal bond interest tax exemption. It's an exemption that 
mainly goes to the very high-end as you may know, Senator 
Romney, and I think it distorts investment. So, I think that 
there's lot of loopholes that go to the high-end that I would 
favor cutting back, or eliminating that would raise revenue, 
and would be good for the economy.
    Senator Romney. Mr. Hendren, do you have anything you want 
to add in that regard?
    Dr. Hendren. No. I mean I'm sure that there's a lot of 
different areas where one could find more efficient policies 
than the current ones that are in place. I would just reiterate 
that audits are especially an efficient source of revenue 
relative to even tax rates at this point.
    Senator Romney. Thank you, Mr. Chairman.
    Chairman Whitehouse. Thank you very much, Senator Romney. 
Next is Senator Johnson.

                  STATEMENT OF SENATOR JOHNSON

    Senator Johnson. Thank you, Mr. Chairman. Let me start at 
the outset. I'm an accountant. I value audits. My wife is an 
IRS auditor, so you know, we need that. There's no doubt about 
it, okay? You can argue legitimately, you know, to what extent, 
how many auditors, you know how much we should spend on it. 
That's a legitimate conversation.
    I do have to admit though every time I hear the Chairman, 
or the Chairman of the Finance Committee say the word wealthy 
tax cheat, I think of the name Hunter Biden, and all the Biden 
family members who have been participating in his influence 
peddling grifts.
    I think it's interesting, as much as this hearing is 
emphasizing on audits, when Senator Grassley and I were 
conducting our very legitimate investigation, using our 
Constitutional responsibility of oversight, when we were 
investigating tax cheating, influence peddling.
    You know, money coming in, tens of millions of dollars, 
from foreign entities to impact potential U.S. policy. Democrat 
Senators, our Ranking Members, not only frustrated, I will say 
obstructed our investigation by falsely claiming we were 
soliciting and disseminating Russian disinformation.
    Now, that just happened to parrot what we've now found out 
the Federal Bureau of Investigation (FBI) set up their foreign 
influence task force, what they were doing in their catch and 
kill operation, find derogatory information that was being 
developed by 40 confidential human sources, and then go kill 
it. Go say oh, don't look into that, don't go down that 
investigatory hole because that's Russian disinformation.
    So, the question I have based on that, Professor Sarin, 
it's obvious we have a dual system of justice applied to tax 
compliance. When somebody is connected politically, as Hunter 
Biden, when his investigatory team allows the statute of 
limitations to expire on the most serious tax evasion charges, 
what does that dual system of justice--what does that do in 
terms of taxpayer compliance?
    Dr. Sarin. So, Senator Johnson, I actually want to take a 
step even higher, but with your sort of thinking.
    Senator Johnson. Quickly please.
    Dr. Sarin. Theme of democracy and heart. In this country 
today we have a two-tiered tax system, as you acknowledge. Your 
constituents who are wage earners, are already paying 
everything that they owe. And a very small proportion of very 
wealthy individuals and large corporations have the 
opportunity----
    Senator Johnson. Okay. And that was your testimony. Again, 
I want you to speak to the fact that the President's son is 
largely skating because they allowed the statute of limitations 
to run. What does that do to compliance in terms of Americans' 
attitude toward that? Professor Hendren? I've got other things 
I need to get to here.
    Dr. Hendren. I have very little to say on Hunter Biden. 
It's a very small portion of the tax gap.
    Senator Johnson. That is true, but it's a very large 
portion in terms of Americans' attitude toward our dual system 
of justice. Mr. Edwards, what do you think that does in terms 
of the public opinion of complying with taxes when one wealthy, 
connected individual basically avoids prosecution?
    Mr. Edwards. I agree, and it shows a general problem, 
there's a huge IRS management problem. We ought to fix the IRS 
management before anything else. The IRS, you know, lost or 
destroyed 30 million tax returns in Ogden, Utah. They don't 
have a good explanation for that.
    The huge theft of thousands of high-end tax returns a 
couple of years ago.
    Senator Johnson. Politically motivated theft, and then 
distribution to ProPublica okay? That's politically motivated. 
I want to turn to the solution here. Again, I'm all for 
auditing. We're always going to need it. The solution is 
simplifying and rationalizing our tax code.
    I developed this chart years ago.\7\ I think it's quite 
interesting. This shows, this goes back to 1959 and shows the 
top marginal tax rate. You know, to what extent are we going to 
punish success? And then the extent to which we were successful 
at punishing success. It's remarkable. Over 60 some years we've 
had a top tax rate as high as 91 percent, 70 percent, 50 
percent, 28, 31, 39.6, now we're at 37 percent.
---------------------------------------------------------------------------
    \7\ Chart submitted by Senator Johnson appears in the appendix on 
page 73.
---------------------------------------------------------------------------
    But over that 60 year time period the average percent of 
GDP that we've raised in revenue is 17.3 percent. It doesn't 
change much because our tax code is so complex, it is so 
difficult to comply with. It is notable that even after, you 
know, the tax cuts from 2018, the last 3 years have been above 
that average, 17.9, 19.6 percent.
    Last year it was 18.2 percent. So, increasing tax rates is 
not going to work. I would say dramatically, and I mean 
dramatically simplifying, but also use the term rationalizing. 
Our tax code is completely irrational. We have different forms 
of tax rates on different kinds of incomes.
    I mean income ought to be income. From my standpoint it 
ought to be based on cash generation. There's so many ways of 
simplifying this, and right there you would dramatically 
increase compliance because again, if tax rates are kept low, 
it's easy to comply with. There's the solution. Let's quit 
talking about sending more agents to harass Americans, and 
let's talk about the real solution, which is simplification and 
rationalization. Would any of you like to comment on that?
    Mr. Edwards. I would just like to comment. Professor 
Sarin's chart that was put up by the Chairman is a fascinating 
chart. I would differ from Senator Romney in that it's true 
that modern businesses got complex. A lot of what drives that 
chart, frankly, is corporations making extremely sophisticated 
structures to avoid tax.
    They don't try to do things that are illegal, it's just 
that the tax code is so gray, they push the limits, and that's 
what I experienced in 5 years at PWC, that's what they try to 
do, push to the limit of a very gray code.
    Chairman Whitehouse. Senator Merkley. Senator Merkley's 
time. We're in Senator Merkley's time now.

                  STATEMENT OF SENATOR MERKLEY

    Senator Merkley. Thank you, Mr. Chairman. Is it correct 
that the IRS estimates that it collected $688 billion less by 
the tax filing deadline than taxpayers legally owed in tax year 
2021? And I think Dr. Sarin or Dr. Hendren?
    Dr. Sarin. That's correct.
    Senator Merkley. That's the correct numbers. Now, I'm the 
son of a mechanic, and my father always said I sure am glad 
that I get to pay taxes because there's been times in life when 
I didn't own--earn enough money to owe any. And he was very 
proud of contributing to the national effort, participating in 
the services our nation provides, be it law and order, the 
court system, the transportation system, fundamental 
humanitarian services, to support families' success and so 
forth.
    I just heard the allegation that collecting taxes due is 
punishing success. Is it punishment on success to enforce the 
tax code?
    Dr. Sarin. Absolutely not. Senator Merkley, and I'll just 
says that outside of the IRS building there's a quote from 
Oliver Wendell Holmes that say that taxes are the price we pay 
for a civilized society, and I feel very deeply with your 
father's sentiment, and I think that's frankly what the 
American people feel as well.
    Senator Merkley. Well, I certainly believe that it 
undermines that sense of fairness and participation if the best 
off among us have full permission to cheat and not pay their 
share. Do you agree with that?
    Dr. Sarin. Absolutely. Very much so, and in fact ordinary 
Americans are automatically paying all that they owe. Their 
taxes are withheld. It's just those at the top of the 
distribution who earn income in opaque ways that have the 
opportunity to evade.
    Senator Merkley. So, colleagues across the aisle have 
proposed not enforcing the tax code with the richest Americans. 
They want to let them cheat. Is that good for America?
    Dr. Hendren. You know, I think it's a very inefficient 
thing to do, our work suggests that we are--we can get back, as 
I said before $12 for every $1 that we put into IRS 
enforcement, and that makes it even a more efficient way of 
raising revenue relative to other sources of like tax rates.
    Dr. Sarin. And Senator Merkley, as you point out, it's not 
just a matter of revenue raising, though it is 3 percent of GDP 
that we're losing each year in uncollected taxes. But it's also 
this matter of like fundamental fairness that the laws should 
apply. I believe, I'm a law professor, I believe very strongly 
in the rule of law. The laws should apply across the income 
distribution, and it shouldn't be that the wealthy and large 
profitable corporations have at their disposal tools to evade 
that the rest of the American people do not.
    Senator Merkley. So that 3 percent of GDP that should be 
collected under the rules means we have to borrow that 
additional amount. Is borrowing more in order to let the 
wealthiest off the hook good for America?
    Dr. Sarin. It's not. And neither, frankly, is raising taxes 
that are only going to be borne by the share of taxpayers that 
are complying with their tax obligations. So, as we think about 
how to deal with our growing deficits and our debt problem, it 
strikes me that the lowest hanging fruit has to be collecting 
the taxes that are already owed by taxpayers who today, are at 
the top of the distribution, are doing the best, and just 
aren't paying their fair share.
    Senator Merkley. Well, I must say, you know I live in a 
blue collar community, and I think the sentiment would be 
universal that while we're paying our fair share, the wealthy 
need to pay their fair share too. And because it's not 
collected in advance, and that's kind of a privilege of the 
type of income they're earning, that in fact they need to know 
that they will be held accountable, so there's an incentive to 
be honest upfront, unfortunately takes an incentive for many 
individuals in America who see this not as the honor of doing 
their share as a citizen, but see it as a game to be played to 
cheat the system as much as possible.
    And I was struck when I first went to college and started 
hearing fairly affluent people talking about the pride they had 
on having developed different tax strategies to dodge, 
including out of country strategies, and that was so contrary 
to the vision that I believe in, of everyone doing their fair 
share in part for this country.
    So, thank you all for your testimony. I hope we'll see an 
eruption of integrity across the board, and bipartisan support 
for the integrity of every citizen paying their fair share, and 
not a strategy of trying to let the richest Americans cheat, 
undermining the success of the entire social contract across 
this country. Thank you.
    Chairman Whitehouse. Thank you, Senator Merkley. We turn 
now to Senator Lee, who will be followed by Senator Kaine.

                    STATEMENT OF SENATOR LEE

    Senator Lee. Thanks so much, Mr. Chairman. Thanks to each 
of you for being here. Based on the title of today's hearing, 
one might think that America's wealthiest taxpayers are just 
robbing, or constantly shortchanging the U.S. Treasury.
    It's just exaggerated, and it's ultimately inaccurate. It's 
a disingenuous claim that's used as justification for pursuing 
historic expansion of federal spending. And a radical 
redistributive economic policy agenda that would make Franklin 
D. Roosevelt (FDR) and Lyndon B. Johnson (LBJ) blush.
    Let's be clear. For obvious good reason, tax evasion is 
very much illegal under our federal tax code. It's illegal, 
it's wrong, and it's to be discouraged and punished whenever 
it's found. Many of my colleagues on the other side of the 
aisle frequently conflate, perhaps knowingly, perhaps not, 
illegal tax evasion, which has a technical meeting under the 
law, with legal measures that taxpayers may use legally to 
reduce their tax liability
    There is a difference between those two things. And those 
things matter. By all means we should debate whether some of 
these tax expenditures, such as the State and Local Tax (SALT) 
deduction ought to exist, and to what extent they ought to be 
recognized. And instead, many in today's Congress and in this 
administration, have called for confiscatory tax policies that 
are either unconstitutional, such as the wealth tax, or 
unjustifiable and extremely complex proposals that seek to tax 
gains that have not yet been realized as income.
    And those I would add, are almost certainly 
unconstitutional themselves. So, when it comes to so-called tax 
fairness, it's definitely worth remembering the U.S. tax code 
has been, and continues to be undeniably, very progressive. 
Just look at the most recent Treasury Office of Tax Analysis 
estimates on the national individual tax burden.
    Those show us a few things. They show us, for example, that 
the top 1 percent of U.S. taxpayers earned roughly 20 percent 
of all income nationally, and while earning roughly 20 percent 
of all income nationally paid 42 percent of total federal 
income taxes, so this group's average federal income tax rate 
was 22 percent.
    The bottom 50 percent, on the other hand, earned 14 percent 
of all income nationally, and paid negative 5.5 percent of 
total federal income taxes. This group's average federal income 
tax rate was negative 6.3 percent, meaning net federal tax 
burdens on average are actually negative for the lower half of 
American taxpayers by household income, in other words, getting 
more back through refundable tax credits than what they pay in.
    If this isn't evidence of an overwhelmingly progressive 
federal tax system currently in place, I don't know what would 
be. I don't know how it could be more progressive than that 
within our system. Even if we look at the distribution of the 
federal tax burden in a broader way, by including the payroll 
tax burden, the federal tax code remains overwhelmingly 
progressive.
    Another inconvenient truth some of my colleagues like to 
omit, while making claims of how desperately we need more tax 
revenue is that federal tax revenue is a percentage of GDP, was 
19.6 percent in 2022. This is unusually high. In fact, this is 
the second highest level in the last 60 years, and about 2 
percentage points higher than the historic average during that 
time period, even during periods when the top marginal tax rate 
has been much, much higher, like well into the 70s.
    Ironically, this explosive growth in revenue was driven in 
large part from significantly higher than expected income tax 
collections from realized capital gains. Regrettably, spending 
in 2022 as a percentage of GDP was still 5 percentage points 
higher than the historical average.
    Further, federal revenues have averaged 17.3 percent of GDP 
over the last 10 years in line with the 60 year historical 
average of 17.4 percent, but federal spending has averaged 23 
percent, way above the 60 year historical average of 20 
percent. And that's only projected to increase, thus creating 
many of the problems that we've got.
    Mr. Edwards, in your written testimony you mentioned that 
while tax enforcement is certainly a worthy goal, the $80 
billion of additional mandatory funding for the IRS is 
excessive, and you described some of the reasons why this was 
an unnecessarily large funding boost for the IRS, and perhaps 
some of the unintended consequences likely to result from it.
    Mr. Edwards. Well let me start by saying I agree with what 
Senator Merkley was saying, and what you're saying about 
fairness. You know, we all want fairness. I just think by going 
to the enforcement lever first, you're putting the cart before 
the horse.
    The better way to improve tax compliance, increase fairness 
for everyone is to simplify the tax code, improve IRS customer 
service, improve their IRS technology, and that way we boost 
tax compliance, and would be good for taxpayers and the 
economy. Enforcement is a win/lose proposition, especially when 
the tax code is so complicated it creates a lot of collateral 
damage on businesses and individuals who are already paying the 
proper amount.
    Senator Lee. That's right. I see my time's expired.
    It is worth noting here again, even when our top marginal 
rates were sky-high, we still weren't departing meaningfully. 
We still weren't reaping more than the historical average of 
just under 17.5 percent of GDP. So that candle can only be 
burned so many ways. It doesn't make that big of a difference 
on that end, and can reduce compliance, and therefore 
ultimately reduce revenue. Thank you.
    Chairman Whitehouse. Thank you, Senator Lee. Senator Kaine.

                   STATEMENT OF SENATOR KAINE

    Senator Kaine. Thank you, Chairman Whitehouse, and thanks 
to the witnesses for being here. The title of this hearing is a 
colorful one, but it should be a no brainer for all of us. You 
know, if people are cheating, especially cheating the Federal 
Government out of sizeable tax revenues, we should have a 
system that enforces them and catches them, and they should pay 
for the reasons that Senator Merkley was describing.
    I'm very concerned about efforts to raid IRS funding 
because what I really want with an IRS is an IRS that's 
responsive to Virginia constituents. And in the past, I've been 
in the Senate. I guess I'm in my 11th year now. I monitor my 
1,000 outreaches a day, 365 days a year from constituents with 
concerns.
    I know what are the major ones, and IRS issues tend to be 
near the top. And the ones that are there are not the IRS is 
cracking down on me, so much as I can't get a call returned. I 
can't get my refund back in time. I want to be able to do, you 
know, pay what I should, but I would like an IRS that's 
responsive.
    And I worry about efforts to raid the IRS funding as 
diminishing the quality of service that the IRS is able to 
provide to my constituents. My casework team in Virginia has 
helped hundreds of folks with IRS issues. And here's just a 
small taste of what they deal with.
    Multiple issues of constituents needing proof of their 
federal employer ID number, and being unable to reach anyone at 
the IRS to assist. Multiple issues of constituents having a tax 
lien on their property, and being unable to reach anyone at IRS 
to get a payoff amount in order to close on a real estate deal.
    Multiple issues of constituents submitting a tax payment 
with their tax return, and where the IRS has either cashed the 
check, but then failed to process the return, or where the 
check would be returned to the constituent, who would later get 
a bill for late payment once the return was finally processed.
    Multiple issues of the IRS requesting ID verification and 
constituents would either complete the process online, and 
their return would still not be processed, or they would be 
unable to get an appointment to complete the process in person 
at a taxpayer assistance center.
    Over the last 11 years, my casework team has had to help 
straighten out these problems, and many others as constituents 
deal with an IRS that is operating without the funding and 
technology necessary to effectively serve constituents. Dr. 
Sarin, the focus of most of the conversation around the IRA on 
funding has been about enforcement, but much of the funding 
that we passed was simply to enable the IRS to function 
properly, and provide the level of service that American 
taxpayers have a right to expect.
    Can you talk about some of the ways that the IRA funding is 
already helping address the wide variety of issues that my 
constituents and those of my colleagues are dealing with on a 
regular basis when they're interacting with the IRS?
    Dr. Sarin. Absolutely. And Senator Kaine, your sort of 
laundry list of challenges that you've dealt with over the 
years actually reflects all the ways in which the IRS is making 
substantial progress. Refunds are being processed faster than 
ever before. You're in a situation where yesterday Treasury 
Secretary Yellen announced that walking into the next filing 
season the IRS is going to be in a position where it can 
process and intake information from all taxpayers digitally.
    And that might seem small, but it's actually monumental 
when you think about what it means for small business owners 
who no longer have to fax forms to the IRS, but instead can be 
in a position where they can just upload them online. It's much 
simpler. It's much more efficient. Phone calls are being 
answered. People are getting help with respect to making sure 
that they do what they want to do, which is fulfill their tax 
obligations accurately.
    And to be clear, just like you're worried about, Senator 
Kaine, I want to emphasize, there is no way to rescind any 
portion of the IRA funding and preserve these service gains. 
Any dollar that is taken from the IRS is going to mean less 
good service for your constituents.
    Senator Kaine. One of the things that I've noticed about 
the passage of the IRA, it led so quickly to improved 
constituent service, and again I'm seeing that on real time, 
just because every day we get complaints about every federal 
agency. And if I watch the IRS complaints coming into my office 
drop dramatically, I know something is going on.
    I know something is going on when people are getting their 
refunds quicker because we hear about that every day in the 
phone calls to our office. And so, there were few aspects of 
the IRA that produced a constituent response so quickly, as the 
investments that we made in the IRS, because the IRS has used 
those investments to dramatically improve the customer service 
experience.
    And they plan to go further. I noticed Secretary Yellen's 
announcement yesterday too, and Mr. Chair, I'd like to 
introduce the statement of new policy that came out from the 
Department of Treasury yesterday titled IRS Achieves Key 
Paperless Processing Initiative Goal, Outlines Improvements for 
Filing Season 2024, because the IRS is not done with making 
constituent service.\8\
---------------------------------------------------------------------------
    \8\ Document submitted by Senator Kaine appears in the appendix on 
page 74.
---------------------------------------------------------------------------
    And we shouldn't screw it up by rescinding dollars that 
we've invested, and then to enable them to serve American 
taxpayers better. I'd love to put this into the record.
    Chairman Whitehouse. Without objection the document will be 
added to the record.
    Senator Kaine. And I yield back.
    Chairman Whitehouse. And we now turn to Senator Kennedy.

                  STATEMENT OF SENATOR KENNEDY

    Senator Kennedy. Thank you, Mr. Chairman, and thanks to all 
of our witnesses today. Professor Sarin, you're a professor at 
Yale Law School?
    Dr. Sarin. I am.
    Senator Kennedy. Okay. And I see you've been pretty active 
on Twitter. I'm looking at one of your tweets from a few months 
ago, October 30th, 2023. I'd like to read it to you. ``The 
House Republican stance is I kid you not, support for Israel as 
long as we make it easier for people to cheat on their taxes.'' 
Did you tweet that?
    Dr. Sarin. That's correct. Yes.
    Senator Kennedy. Okay. How many Republican Congressmen or 
women did you talk to before you made that statement?
    Dr. Sarin. I was reacting to the fact that and we talked 
about it actually----
    Senator Kennedy. First, if you could, how many Republican 
Congresswomen or Congressmen did you talk to?
    Dr. Sarin. I didn't talk to them. I actually was just 
reacting to the legislation that was proposed. Passed.
    Senator Kennedy. You didn't talk to any of them?
    Dr. Sarin. No, sir.
    Senator Kennedy. Before you said that every single one of 
them supports Israel only if it is made easier for people to 
cheat on their taxes?
    Dr. Sarin. I actually don't think that every single one of 
them believe that.
    Senator Kennedy. But that's what you said.
    Dr. Sarin. But I do think that the legislation passed by 
the House reflects a statement of purpose that in order to 
support Israel----
    Senator Kennedy. But I'm looking at what you said.
    Dr Sarin. To allow taxpayers to be able to cheat on their 
taxes.
    Senator Kennedy. You said that every single House 
Republican, none of whom you talked to, would only support 
Israel if it was made easier for Americans to cheat on their 
taxes. Now, you said that. And you didn't talk to any of them. 
Did you?
    Dr. Sarin. Senator Kennedy, I am struck by, and perhaps 
this is something on which we agree, that it is incredibly 
important to support Israel. It is also incredibly important to 
make sure that taxpayers----
    Senator Kennedy. We agree on Israel. I just can't believe 
you would say this about members of Congress. It's pretty 
pejorative. This just--let me finish, without talking to them. 
I mean would it be possible for somebody to support a reduction 
to the IRS budget because they simply believe the Federal 
Government ought to have a balanced budget? Would that be a 
fair position?
    Dr. Sarin. That wouldn't be----
    Senator Kennedy. Would that be a principled position?
    Dr. Sarin. Except that that actually doesn't work with 
respect to defunding the IRS.
    Senator Kennedy. Would it be a principled position?
    Dr. Sarin. It wouldn't be an accurate position because 
defunding the IRS----
    Senator Kennedy. But you don't know because you didn't talk 
to anybody did you? You just said it.
    Dr. Sarin. Well, defunding the IRS, the CBO agrees, 
everyone who's testifying today agrees that that is going to 
add to deficit.
    Senator Kennedy. Could it be that a House Republican wanted 
to reduce the IRS's budget because they think that the IRS is a 
model of inefficiency and shouldn't be rewarded with more 
money. Could that have been a possibility? A motivation for the 
way they voted?
    Dr. Sarin. Senator Kennedy, I so appreciate that question 
because the reality is that----
    Senator Kennedy. Could that have been a motivation for the 
way they voted?
    Dr. Sarin. And it relates very closely to what Senator Lee 
said.
    Senator Kennedy. And could that have been a motivation for 
the way they voted?
    Dr. Sarin. The reason that you've seen an----
    Senator Kennedy. Could that have been a motivation.
    Chairman Whitehouse. If you allow the witness to answer? 
You might get your answer Senator Kennedy.
    Dr. Sarin. It frankly couldn't have been.
    Senator Kennedy. It could or couldn't?
    Dr. Sarin. It could not have been.
    Senator Kennedy. How do you know? You didn't talk to them?
    Dr. Sarin. Because the reason why you've seen the IRS----
    Senator Kennedy. You just made this statement that every 
Republican in the House supports Israel only if it has been 
made easier for people to cheat on their taxes. Could it be 
that maybe a House member thought that well, the more money we 
spend, the more deficits we have. And the more deficits we 
have, the more pressure is put on interest rates, and the 
higher interest rates go, the more it hurts the poor. Could 
that have been the position of one of the House Republicans?
    Dr. Sarin. Senator Kennedy.
    Senator Kennedy. Could it have been theoretically?
    Dr. Sarin. It couldn't have been. Because everyone--it 
frankly couldn't have been.
    Senator Kennedy. It couldn't have been? How do you know? 
You didn't talk to them?
    Dr. Sarin. Well, I know that everyone agrees, including 
witnesses across the aisle, including CBO, including every 
single tax expert that has contemplated this question, that 
defunding the IRS makes deficits worse, not better. And so, 
this is a deficit measure.
    Senator Kennedy. I just find it, Professor, appalling. 
Appalling, that you would make a statement like this, a vicious 
statement like this, without talking to a single person about 
whom you made the statement. And I'm going to remind you, you 
know, you're only--you can only be young once, but you can 
always be immature, and you ought to think about that.
    Dr. Sarin. Thank you, Senator.
    Senator Kennedy. Thank you.
    Chairman Whitehouse. Let me just say that I think that the 
treatment of witnesses is beginning to degrade a bit here, and 
I'm going to strike some commentary if it continues down this 
road. I think personal insults to witnesses are not appropriate 
and I will not be tolerant of that in this Committee.
    Senator Kennedy. Well, could I respond, Mr. Chairman?
    Chairman Whitehouse. Fire away. I think you just called a 
young law professor immature.
    Senator Kennedy. You're going to do what you've got to do, 
but I'm going to continue to use my time. You bring witnesses 
as you're entitled to, and some of them are very good. Some of 
them have the credibility of--and I'm going to use my time when 
I think it's appropriate to--let me finish my thoughts Sheldon.
    Chairman Whitehouse. And I'm going to use my authority as 
Chairman that I think it is appropriate to----
    Senator Kennedy. Well you do what you've got to do, and I'm 
going to do what I've got to do.
    Chairman Whitehouse. The behavior in this Committee.
    Senator Kennedy. It's meant to bully me.
    Chairman Whitehouse. No attempt to bully you.
    Senator Kennedy. You're talking of all that.
    Chairman Whitehouse. No attempt to bully you, not at all. 
It's to keep the witness and the Committee free of bullying.
    Senator Kennedy. I'm entitled to test their credibility, 
and I think one of our witnesses just got tested.
    Dr. Sarin. I hope I passed, Senator, thank you.
    Senator Kennedy. You didn't.
    Chairman Whitehouse. There are other views on that. Senator 
Braun.

                   STATEMENT OF SENATOR BRAUN

    Senator Braun. Thank you, Mr. Chairman. My questions are 
going to be focused on when you spend money like this bill 
does, what kind of return on investment are you going to get 
from it? The proforma from the CBO says that we'll be spending 
$80 billion over 10 years, and we're going to be generating 
$180 billion. So, you divide that net by 10 years, it's $10 
billion a year.
    So, I want to go back to the chart that I think is most 
important, Senator Johnson had it here earlier, is the 
stubbornness in our current system of regardless of what you do 
based upon tax rate, we end up over 63 years here, generating 
basically the same percentage of our GDP in revenue.\9\
---------------------------------------------------------------------------
    \9\ Chart submitted by Senator Johnson appears in the appendix on 
page 73.
---------------------------------------------------------------------------
    To me that should be the given that we're dealing with 
here, and of course we're currently running $2 trillion 
deficits annually. The White House has put out 42 trillion to 
be in debt in 5 years, 52 in 10 years. So, this is a rounding 
error in terms of what it's going to do to save money.
    That I think is a given, and that is a very small 
percentage of our total problem. And then I want to talk about 
the trajectory of where we've come from just the short time 
I've been here, where we had structuralized trillion dollar 
deficits annually, and now we structuralize trillion dollar 
deficits every 6 months.
    So, we've got issues that go way beyond----
    Chairman Whitehouse. Senator Braun, can I just interject 
for one second on a matter of Committee business. I've got to 
get to the Finance Committee now. Senator Kaine has kindly 
agreed to close the Committee, so you have your time and my 
apologies for interrupting, but I wanted to let everybody know 
what's happening here, and that Senator Kaine will be taking 
over the gavel for the remainder of the hearing.
    Senator Braun. Thank you, Mr. Chairman. So, I'd like to 
hear from all the witnesses what we really do to fix the 
problem. This is not something that is going to measure in any 
way, and even when you look at the impact from the tax cuts of 
2017, that was proforma at 150 billion per year over 10 years, 
1.5 trillion.
    The CBO, which I was working with them, was getting very 
close to showing that when you do lower rates, you put a little 
less into the Treasury out of the gate. But then economic 
growth has to be taken into consideration. So, what are the 
ways that we actually get our budget back in order?
    Set this aside because it's a rounding error in terms of 
what it's going to do, or won't do. I'd love to hear ideas on 
how we get our hands around something that is going to explode 
over the next 5 and 10 years, and this is not going to make any 
difference, and it's an estimation too. There's no guarantee 
that we'll even get those savings.
    I'll start here with Mr. Edwards, and then go across the 
panel.
    Mr. Edwards. So, I agree with what you're saying there. I 
think that increasing enforcement on high-end folks may be, you 
know, triple, or quadruple the auditing. You maybe get 10 or 20 
more billion a year, but that's only 1 percent of the federal 
deficit. In my view, we need larger spending cuts. I suggested 
some spending cuts in my testimony for entitlements.
    Let's at least start with cutting benefits like social 
security, just for the very high end. There's no reason why 
Bill Gates needs to get Social Security. We can't afford that 
anymore. And secondly, I would say that we have to revise 
federalism in this country. The Federal Government spends over 
$1 trillion a year subsidizing state and local governments.
    I mean the Affordable Care Act (ACA) match for Medicaid is 
a 90 percent match. We can't afford that anymore. Let's cut 
back these matching payments to the states, in my view, get the 
federal government out of areas like K-12 education that the 
states are really responsible, so revising federalism, I think 
is a very important way to get the deficit down.
    Senator Braun. Because the current deficit that we're 
running it was like 20 cents on every $1 we were spending just 
five years ago, now it's 30 cents. It's jumped 5 years ago, now 
it's 30 cents. It's jumped from $1 trillion a year to $2 
trillion, so something's got to give on the level of spending 
because since the Biden administration has taken over, defies 
any ability to generate revenue that would come close to the 
levels that we're spending at. Do you agree with that?
    Mr. Edwards. As you know, we're in a death spiral now 
because the deficit of $2 trillion is going up and up and up. 
Long-term government borrowing rates gone up to 5 percent, and 
I don't see any, you know, forecasts for interest rates going 
down. Rising interest rates, high debt and deficit is kind of a 
death spiral.
    We've seen what happens in other countries, and we've got 
to avoid that here.
    Senator Braun. So, Dr. Hendren, would you agree that 
anything to do with what this might do, say it's at 10 billion 
a year, is insignificant compared to the broader issue that we 
just spend way more than we can ever expect to take in.
    Dr. Hendren. So, I don't want to understate the size of the 
problems that are faced with the budget in the United States, 
but I also don't think we should understate the size of the 
return to additional IRS audits, as I was saying at the onset 
of my remarks, every $1 that we spend there gets us back $12 
over the long-run, and I think we share, as you were 
suggesting, the idea that when we think about trying to raise 
revenue, we should do it in the way that has the least 
distortionary cost.
    And by our estimates, expanded audits yes, on top earners 
is a more efficient way of raising that marginal dollar right 
now, than changing.
    Senator Braun. But it is also nearly insignificant as a 
percentage of the total issue. Would you agree with that?
    Dr. Hendren. So, I think you know, you can't audit more 
than the amount.
    Senator Braun. But you're saying every $10 billion counts. 
It's going to somehow lead to where we get rid of the $2 
trillion deficits annually.
    Dr. Hendren. I think the math would not work out that if 
you just tried to close the deficit with just audits, I think 
that would be difficult, however I do think that we should 
think about the marginal return on additional dollar in there, 
I think----
    Senator Braun. And then do you have any suggestions of what 
we do structurally to live within what appears to be a very 
stubborn amount of revenue that we can generate in our current 
system, regardless of the tax rate, regardless of how much 
you'd audit?
    Dr. Hendren. Yeah. I guess I would be a little bit less 
pessimistic about the graph that you guys are showing with the 
percent of tax revenue, GDP going from 0 to 100 on the same 
graph. I think that's not very well emphasizing the changes in 
the tax revenue we can actually get.
    But I do think that there is, you know, more that one would 
have to do beyond just audits in order to close the structural 
deficit. I think that's right, but I feel like I hope that we 
take the same level of kind of principled analysis.
    Senator Braun. Maybe like not spending more than you take 
in?
    Dr. Hendren. I think, you know, look I'm an economist. I'm 
happy to give you the budget constraint as a principle for us 
to think about. But I think what we should think about is for 
every dollar we spend, what's the bang for the buck that we get 
on that.
    Senator Braun. Dr. Sarin, what do you think of the modern 
monetary theory where all of this just makes no difference, and 
that we can go into the future on the trajectory we're at now. 
Stick with that theory?
    Dr. Sarin. I deeply disagree with that theory, and I share 
your deep concern that we're on a fiscally unsustainable path. 
Debt to GDP ratios are going to rise to at least 119 percent of 
GDP over the next decade, and significantly more over the next 
three decades. Unless we come up with real solutions. And I 
would be keen to work with you on them, I just want to 
emphasize that I actually think like Dr. Hendron does, that tax 
and tax reform can be a very substantial part of that solution.
    Senator Braun. It's going to be $10 billion a year. Do you 
have any other ideas in terms of what we do other than just 
quit spending more than we take in?
    Dr. Sarin. So, Senator Braun, I want to emphasize that my 
estimates, and Dr. Hendron's estimates are that over the course 
of the decade, by adequately funding the IRS you can generate 
$500 billion, and so that's----
    Senator Braun. Not according to the CBO.
    Dr. Sarin. That's pretty significant revenue, and the 
reason for the differences between us and CBO has to do with 
the fact that taxpayer behavior adjusts in ways that are really 
important, and aren't reflected in CBO's estimates. But I want 
to say that there are other things that you can do as well.
    And in fact, Kim Klassing and I put together a tax reform 
proposal that we hope to talk to you about ahead of 2025, that 
calls for around $3.5 trillion of new revenue raising that can 
come from things like equalizing the tax burden faced by 
capital and labor, international tax reform, corporate tax 
reform, that have the potential to raise really substantial 
revenue, and help us deal with our growing debts and deficits.
    Senator Braun. And you don't think that would be a wet 
blanket on the economy?
    Dr. Sarin. I actually don't. The estimates of sort of the 
impact of the Tax Cuts and Jobs Act (TCJA) on investment are 
that investment went up very, very insignificantly relative to 
the revenue cost associated with decreasing the corporate tax 
rate from 35 to 21 percent. And so, I do think that there is 
really substantial scope here for us to think seriously about 
revenue raising in ways that are pro-growth, not anti-growth.
    Senator Braun. Thank you.
    Senator Kaine. Dr. Sarin, I wanted to come back to you on 
the questions that Senator Kennedy was asking you. He does that 
a lot to witnesses. He's a very effective lawyer. He's very 
effective at testing credibility, and I'll just be candid. 
Usually, the tweets that he reads make me wince, like wow, I 
wish that person wouldn't have written that.
    But I actually thought your tweet was not offensive. I 
haven't talk to any of the House members either about what they 
proposed, but let me tell you the way I understood that 
comment, and then you tell me if I was reading it wrong.
    The House passed a standalone proposal to fund the 
supplemental request for aid to Israel. And they could have 
just passed a standalone with nothing connected to it, or they 
could have done other things in the national security space, a 
Ukraine aid package, Gaza humanitarian relief.
    They could have done that. Instead, they did nothing else 
in the national security space, and what they wanted to do was 
significantly rescind funding to the IRS. Now, facially that 
has no connection, absolutely no connection to America's 
support for Israel, so why did they put it in?
    Well, they described why they put it in, and then it has 
also been widely discussed a second reason why they put it in. 
The reason they put it in was they said they were coming up 
with a pay for, for the Israel aid. Now, it was the opposite of 
a pay for, for the reason you described.
    Because if you take that money out of the IRS, the CBO and 
others said the effect on the deficit would be very dramatic. 
And so, they claimed that it was a pay for, when it was the 
opposite of a pay for, and so that raises the question, hmm, 
there's sort of a pretext going on here.
    That's a classic legal strategy when a reason is asserted 
that makes no sense, it's called a pretext, and then you try to 
get into okay, what's the real issue going on? And the real 
issue going on, which they also described, is we think we can 
jam the Senate because the Senate supports aid to Israel.
    The Senate is likely to be forced to rescind the portions 
of the IRA that have helped constituent services, that have 
generated refunds quicker, that have enabled people to answer 
the phone on time. But we'll jam them because we're putting it 
on to an Israel aid package.
    And so, that's the way I interpreted your tweet, and many 
were saying things almost exactly the same, that the lack of 
any connection between the IRS rescission and the Israel aid 
raised real questions. And the asserted rationale that it's 
paid for was completely inaccurate, which then raises the 
question of why are you trying to do it.
    Now, I think there are other circumstances under which 
House members will vote for Israel aid, so I don't think it's 
necessarily that they will only vote for Israel aid if you take 
an axe to the IRS, but by taking an axe to the IRS, they were 
trying to accomplish a goal that would hurt my constituents, 
weakened customer service at the IRS, and increase the deficit. 
Did I understand your tweet correctly?
    Dr. Sarin. You did, Senator. And I should say this actually 
isn't, and you know this of course, funding--adequate funding 
for the IRS has never historically been a partisan issue.
    Senator Kaine. Right.
    Dr. Sarin. In that if you look at budgets put forth by 
President Reagan, both Presidents Bush, President Clinton, 
President Obama, President Trump, everyone called for adequate 
funding of the IRS as a tool by which to generate additional 
revenue. Because when you go after the people at the top of the 
distribution and large, profitable corporations, who today are 
underpaying their tax obligations, that raises substantial 
revenue.
    Senator Kaine. Yes.
    Dr. Sarin. And the idea of defunding the IRS as a pay for, 
or an offset is just so fundamentally backwards, because it 
does the exact opposite of raising revenue. It decreases 
revenues, in ways that I find deeply troubling, and so I 
definitely stand by what I said.
    Senator Kaine. Well I want to thank the witnesses for 
appearing before the Committee today. Your full written 
statements, of course, are going to be included in the record. 
And for all Senators, if there are questions for the record, 
they would be due by noon tomorrow, with signed hard copies 
delivered to the Committee Clerk in Dirksen 624 email copies 
will also be accepted.
    And we would ask the witnesses to respond to any questions 
that are submitted by Senators within 7 days of receipt. With 
no further business before the Committee, this hearing is 
adjourned.
    [Whereupon, at 11:43 a.m., Wednesday, November 8, 2023 the 
hearing was adjourned.]

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