On July 27, Senators Joe Manchin (D., W.Va.) and Chuck Schumer (D., N.Y.) announced a deal that will likely bring the Democrats’ tax-and-spending bill to the president’s desk. Manchin was one of the sole remaining Democrat holdouts, claiming that he could not support tax increases at a time of high inflation.
But he caved. So on August 7, the Senate passed H.R. 5376, misnamed the “Inflation Reduction Act of 2022.” The bill carries $437 billion in tax increases, greatly trimmed down from the $739 billion initially proposed.
I say the bill is misnamed because there is nothing in it that will reduce inflation. One of its key elements is to increase corporate taxes by $313 billion through a new 15 percent corporate-minimum tax. But this will only hinder investment and productivity, the very things needed to quell inflation. As I point out here, high corporate taxes cannot and will not reduce inflation.
Another key element of the bill is the provision to fund the Internal Revenue Service (IRS). The bill would appropriate $80 billion in new revenue (over its usual annual appropriation of about $12 billion) to the IRS over the next ten years. Here’s how some of the new money is to be used:
$3.181 billion for taxpayer services, including pre-filing assistance and education, return filing and account services, and taxpayer-advocate services;
$4.751 billion for business-systems modernization, including updating computer systems generally and the development of call-back technology; and
$25.326 billion for operations support, including general expenses to support taxpayer services and enforcement, general administrative expenses for such things as rent, printing, postage, vehicles, etc.
The centerpiece of IRS spending would be for tax-law enforcement. The bill promises $45.638 billion for this purpose, to include enhanced audits and collection, legal and litigation support, criminal investigations, digital asset monitoring and compliance, and the general enforcement of tax laws and other financial crimes.
And while the administration has repeatedly assured us that the targets of this increased enforcement action will be only high-income earners, I have shown clearly that the targets will likely be self-employed persons, along with those who claim the benefits of the laundry-list of refundable tax credits — lower-income taxpayers.
But even if the IRS targets only high-income taxpayers, spending the lion’s share of the $80 billion on enforcement is simply bad policy.
Compare the enforcement appropriation with that of taxpayer assistance and education. Enforcement is a winner by a margin of more than 14-1. And yet, only 2 percent of total federal revenue comes through enforcement. That means 98 percent of every dollar paid to the government is paid “voluntarily,” that is, without the need of IRS intervention.
To the extent that people fail to comply with the law, the vast majority of what is deemed non-compliance is not really non-compliance at all. People do not wake up one morning and say, “How can I tick off the IRS today? I know. I’ll stop paying my taxes!” Nobody wants to get sideways with the IRS, and an overwhelming majority of citizens screw themselves into the ground to stay on top of their tax obligations.
Rather, failure to comply is generally attributable to either (1) a misunderstanding of what the law requires, or (2) the inability to comply due to some unforeseen circumstances. Examples include (but certainly aren’t limited to) catastrophic illness or injury, a failed business or marriage, addiction, or natural disaster. Over the past two years, I’ve seen countless issues directly related to the Covid pandemic.
Policy-makers at every level fail to grasp the magnitude of tax-law complexity. The tax code was changed more than 5,900 times since 2001, and that doesn’t count the many changes that occurred in 2020 and 2021. The 2018 Tax Cuts and Jobs Act constituted the most sweeping change to the tax code since the Tax Reform Act of 1988. As proof that policy-makers simply ignore this issue, consider that the 1998 Internal Revenue Service Restructuring and Reform Act required the IRS to submit an annual report to Congress on the sources of tax complexity and how it might be reduced. The IRS has issued just two such reports, and none after 2002. I take this to mean they just don’t care about the burdens the Byzantine tax code places on taxpayers.
Honest taxpayers — individuals and businesses alike — are drowning in the flood of so-called tax reform to the point where they cannot quickly and easily ascertain their legal responsibilities.
If Congress is not going to stop changing the law several times every year, the IRS has to recognize that people need help complying. The 14-1 enforcement ratio must be turned on its head. That is, the IRS should be spending vastly more resources to help people comply on the front end, rather than grinding them into powder on the back end when they don’t. (For more from the author of “Expect the IRS to Turn the Dogs Loose” please click HERE)
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