Final answer:
The IRS is more likely to collect increased tax revenue as more workers move from off-the-books jobs in black markets to taxed employment in the formal economy, which would subject their incomes to payroll and income taxes. The supply-side economic theory suggests that lower taxes could boost economic activity and increase the tax base, potentially raising total revenues.
Step-by-step explanation:
The IRS will be likely to collect more tax revenue if there is a shift in employment from black markets to formal markets. This transition typically involves workers moving from unreported and untaxed jobs to legitimate employment, where their incomes become subject to payroll taxes and potentially personal income taxes as well. The payroll tax, which funds Social Security and Medicare, is the second largest source of federal revenue and has increased over time. With more workers participating in the formal economy, there would be an increase in the collection of taxes, making it a significant revenue stream for the government.
Economist Arthur Laffer famously suggested that sometimes lowering tax rates can lead to an increase in income tax revenue because it could encourage economic activity. This concept, known as the Laffer Curve, posits that lower taxes can spur working, saving, and investing, which can broaden the tax base and increase total tax revenues.
It is also important to note that improving compliance with existing tax laws, like ensuring employers adhere to regulations regarding the hiring of undocumented workers as per the Immigration Reform and Control Act of 1986, can result in increased tax revenue without altering tax rates. However, tax policy changes such as these often face political resistance due to their lack of popularity among elected officials and diverse impacts on different sectors of the economy.