The US government might see a significant drop in tax revenue this year, with the Treasury and IRS projecting a decline of over 10% compared to 2024, potentially exceeding $500 billion by the tax filing deadline.
IRS Staffing Cuts
The Trump administration, through Elon Musk's founded Department of Government Efficiency (DOGE), has reportedly dismissed more than 11,000 employees and plans to fire nearly 20,000 more. These cuts have affected the IRS's ability to process returns and conduct audits, turning focus to 'essential functions' and delaying or halting some enforcement activities.
Fewer Tax Filings
IRS data indicates a 1.7% decrease in tax returns filed compared to 2024. This trend is linked to more taxpayers openly declaring intentions to avoid paying taxes or claiming deductions illegally, believing audit risks are minimal.
Tariffs to Cover Revenue Deficit
Amid the tax revenue decline, Trump's administration considers eliminating federal income taxes for individuals earning under $150,000, provided the budget is first balanced. Commerce Secretary Howard Lutnick noted the administration plans to cut wasteful spending and use tariffs for additional revenue.
Economists caution about the adverse effects of shrinking tax revenue on the efficiency of the US tax system, highlighting the need for significant structural changes to stabilize budget revenues.
