Issue #218: What would happen if the IRS was abolished?

Hi y’all —

What do you want for Christmas?

Nationally, the hottest children’s toys include the latest Barbie Dreamhouse, the Bitzee Interactive Toy Digital Pet and the Hot Wheels Ultimate T-Rex Transporter. I have my eye on a lime juicer, Hogwarts Legacy for Nintendo Switch and a copy of The Kudzu Queen by Mimi Herman.

But if you take a peek at the Santa letters penned by lawmakers like Sen. Ted Cruz, R-Texas, and Rep. Earl “Buddy” Carter, R-Ga., I’d bet their No. 1 ask is… to get rid of the IRS.

It’s not a new concept — politicians have been talking about abolishing, or at least defunding, the Internal Revenue Service for years. The proposal makes headlines monthly, but the agency’s funding has become an especially hot topic ever since Congress gave the IRS $80 billion in the 2022 Inflation Reduction Act.

It makes me wonder… what would happen if the U.S. actually did eliminate the IRS?

When I posed this question to Joe Hughes, federal policy analyst at the Institute on Taxation and Economic Policy, he wanted to make one thing clear right away: “There’s no feasible way to abolish the IRS.”

That’s because getting rid of the IRS does not mean getting rid of taxes. Nixing the IRS would simply mean Congress would have to come up with a new tax collection system, he says, because expecting roughly 168 million individual taxpayers to “mail off a check to the Treasury every year” is unrealistic.

Although there are countries without income taxes, like Bahrain and the Bahamas, they’re muuuch smaller than the U.S. Hughes says they’re able to collect enough revenue through tourism or exports to forgo income taxes on residents; this isn’t feasible for a large, complex economy like ours. And he points out that even in those income-tax-less countries, there are consumption taxes overseen by revenue agencies.

“To my knowledge, there's not a country that collects any type of tax revenue that doesn't have an agency to administer it,” Hughes adds.

Introduced in January, Carter’s Fair Tax Act aims to eliminate the need for the IRS by simplifying the tax code — namely, by getting rid of payroll, self-employment, corporate, estate, capital gains and other taxes — and establishing a 30% sales tax on goods and services. But Alex Muresianu, a federal policy analyst at the Tax Foundation, predicts that this system would lean heavily on state-level revenue departments.

State agencies aren’t built to handle that burden. In addition, Hughes says, there are several states that don't have a sales tax of their own — so the federal government might have to create an agency to administer taxes in those states. (“That's something that sounds a lot like an Internal Revenue Service,” he says.)

The proposed retail tax also might not be high enough. According to a March analysis by the Brookings Institution, a tax at that level “would be insufficient to replace current … income, payroll, and estate and gift tax revenue.” When accounting for tax avoidance and evasion, the Fair Tax Act would result in a revenue loss of nearly $18 trillion over the next decade. Not good.

OK, so what about a less drastic option? What if, hypothetically, Congress just defunded the IRS instead of eliminating it entirely?

Well, to an extent, this is already happening.

When the Democrat-led Inflation Reduction Act initially set aside $80 billion over 10 years for the IRS to crack down on wealthy tax dodgers, several Republican legislators objected. They worried the money would actually be used to hire thousands of agents who would make life harder for everyday taxpayers, families and small businesses. So as part of the debt-ceiling deal hammered out in June, the parties agreed to claw back about $20 billion of that sum.

Muresianu says it’s more plausible that we’d see Congress continue to roll back the Inflation Reduction Act funding than get rid of the IRS. Recent improvements in customer service likely wouldn’t be impacted; rather, the efforts to beef up enforcement would be curbed. This isn’t universally considered to be a great deal, though. Research has shown that every extra dollar the IRS spends on auditing the top 10% can yield $12 in revenue.

“If we slash the IRS, then we're going to collect less revenue,” Hughes says.