Trump's 'attack' on the IRS could cost the government $1 trillion, former Treasury Secretary says

• Ex-Treasury Secretary Larry Summers said Trump's IRS cuts could cost the government $1 trillion.
• A Yale economist told BI that his estimate is conservative, and actual losses could top $2 trillion.
• Trump has ordered sweeping cuts at the IRS to increase "efficiency and effectiveness" at the agency.

On Tuesday, former Treasury Secretary Lawrence Summers said that Donald Trump's "misguided, wanton attack on the IRS" could cost the government $1 trillion over the next decade.

As part of his aggressive cost-cutting strategy, Trump has ordered sweeping cuts at the Internal Revenue Service to increase the agency's "efficiency and effectiveness." These layoffs include a 75% reduction in the IRS's Office of Civil Rights and Compliance, which is responsible for investigating complaints of discrimination against taxpayers.

The statutory body has also experienced repeated leadership shake-ups since Trump took office. Five different people have held the role of acting commissioner since January, including three different people during tax week alone.

Summers, who served as Treasury Secretary under Bill Clinton's administration, told Bloomberg's David Westin that Trump's efforts to cut IRS staff are "threatening the basis of our tax system, which is based on voluntary compliance" and described the president's approach in leading the agency as "raw incompetence."

"I'd be surprised if we're not on a path to sacrificing more than $1 trillion of revenue over the next decade because of this misguided, wanton attack on the IRS," Summers said.

Natasha Sarin, the president and cofounder of the Budget Lab at Yale, told Business Insider that Summers' estimate is conservative, and the losses may top $2 trillion.

"The reality is that we have a very large gap in this country between taxes that are owed and taxes that are collected," Sarin said, estimating that this year there will be about $700 billion in taxes that are owed but won't be collected, due to filers failing to report or under-reporting their taxes.

While intended to streamline IRS functions, Trump's cuts hamstring the agency's ability to appropriately audit the nation's tax filings and, because the IRS is responsible for collecting about 96% of the total federal revenue, may prevent the agency from collecting the revenue that builds schools and roads and covers a large portion of our defense spending, Sarin said.

"The effect that happens when you don't do tax enforcement is kind of like not having traffic cops on the roads in that there's a direct effect," Sarin said. "There are fewer tickets or fewer audits that are done, then there's less revenue that comes but there's also this really important behavioral effect: if you know that there is a traffic camera, you're more likely to obey the speed limit — and the same thing happens with the tax code."

A recent Budget Lab report estimated that if the IRS shrinks by 50% — a workforce decrease of about 50,000 people — the losses will amount to $395 billion in forgone revenue over a 10-year window. But if the lack of IRS resources substantially increases noncompliance among filers, the net revenue loss could rise to $2.4 trillion over 10 years.

While Sarin said she was "cautiously optimistic" when Trump took office because the idea of making the IRS more efficient is not "especially partisan," she said the administration's sweeping cuts have been puzzling and amount to "fundamentally, the destruction of the tax system."

"There's no way to argue that this is effective in any way," Sarin said.

Representatives for Summers and the White House did not immediately respond to requests for comment from Business Insider.