Penny wise, pound foolish

Suzy Khimm offers a great example of budget cuts costing, not saving, us money.

The Internal Revenue Service got hit with a 2.5 percent budget cut for 2012, paring back money for tax enforcement even as tax compliance has gotten worse. The agency got $300 million less than in the previous year — including $193 million less for tax enforcement.

The IRS estimates that every additional dollar spent on enforcement brings in about $4 to $5 dollars of additional revenue, which would mean that the 2012 budget could lose taxpayers anywhere from $772 million to $965 million — more than twice what it originally saved through the cuts to enforcement. As a result, the recent IRS budget cuts would actually be contributing to the deficit, according to Nina Olson, who runs an independent watchdog for taxpayer advocacy within the IRS. According to Olson’s latest report to Congress, the budget cuts combined with the IRS’ growing workload have become “the most serious problem facing U.S. taxpayers.”

The agency, the report (pdf) said, “lacks the resources to maximize revenue collection, thereby exacerbating the federal budget deficit.”

Every time something like this comes up, I think a Senate hearing from June in which Sen. Rand Paul (R-Ky.) seemed flabbergasted by the notion that the government can actually save money through specific kinds of investments. “The idea or notion that spending money in Washington somehow is saving money really flies past most of the taxpayers,” he said at the time.

Understanding this just requires a little bit of thought. If we cut spending on volcano monitoring and tsunami warnings, we save a little money on maintenance, but pay a lot of money on damage repairs after disaster strikes. If we cut spending on food safety, we save a little money on inspection, but pay a lot of money on health care costs when consumers get sick. If we cut spending for the Securities and Exchange Commission, we save a little money on enforcement, but pay a lot of money to clean up financial catastrophes.

And for every dollar the IRS spends on audits, liens, and property seizures, the government brings in much more. If we spend less on IRS enforcement, as Republicans demand, it costs us more.

The “penny wise, pound foolish” idiom has been around for a long while for a reason.