As I have pointed out countless times, all it takes is ONE executive order to the...IRS.
1) Businesses are prohibited from taking any tax deduction associated with an illegal activity. That’s the law TODAY.
2) Hiring illegal aliens is...illegal.
3) Working under a false or stolen SSN is...illegal.
All the president has to do is issue ONE executive order to the IRS telling them to start enforcing the current law and deny any deductions to businesses associated with the hiring of an illegal alien. Suddenly that “cheap” labor isn’t so cheap when you can’t deduct its cost from your taxes.
Perfect? No, but it’s a fast and easy start. No cost to the government and no deportation police to hire. Everything to do the job is in place TODAY.
It's an interesting idea but to make it work I think more legislation is required - namely mandatory E-Verify.
As things sit today if an employee submits an I-9 form with supporting documentation saying he's work eligible the employer is generally safe. Of course the documentation is often fake, but Congress has tried not to turn every business into a detective agency.
The problem with your approach is the government having to identify all the illegal workers and then prove, in court, that the employer knowingly hired them as illegals. If they had been required to use E-Verify instead of relying on employee-provided documentation, it would be a different story.
I'm afraid your proposal would require a huge number of new IRS agents to track down and then prosecute violators.
Don't forget, employers are already subject to criminal penalties if they knowingly hire illegals, so losing get a tax deduction isn't their biggest problem.