Jul 27, 2021

Should we give the IRS more money?

Should we give the IRS more money?
I’m Isaac Saul, and this is Tangle: an independent, ad-free, subscriber-supported politics newsletter that summarizes the best arguments from across the political spectrum — then “my take.” You can read Tangle for free or subscribe for Friday editions, and you can reach me anytime by replying to this email. If someone sent you this email, they’re asking you to sign up. You can do that by clicking here.

Last week, the White House and Republican negotiators began to scramble after Senate Republicans said they would not support legislation that increased Internal Revenue Service (IRS) funding to enforce existing tax laws. The idea was a key strategy that the Biden administration said would help pay for its $1.2 trillion infrastructure package. Not long after the announcement, a vote to push the bill through the Senate failed, and negotiations over funding it have continued into this week.

Earlier this month, the Biden administration and a bipartisan group of senators had come to a broad agreement with roughly $600 billion in new spending. The administration said it would finance part of that new spending by adding $40 billion to the IRS budget, which Biden and negotiators said would yield about $100 billion in tax revenue (about one-sixth of the package’s new cost) by increasing enforcement on people who earn more than $400,000 a year. In 2019, the Treasury Department estimated that the IRS received $512 billion less than taxpayers actually owed, due to underreported income.

Republican Sen. Rob Portman (OH) said the additional funding is now going to be included in a second reconciliation bill, which Democrats can push through absent any Republican votes, later this year.

The IRS budget was $11.95 billion in 2020, down from an inflation-adjusted $14.6 billion in 2010. Cuts to their budget have largely been driven by Republican legislation to trim the budget, which Democrats are now trying to reverse.

Below, we’ll take a look at some arguments from the right and left, then my take.

From the right.

The right is split on the proposal, with some harshly critical of the additional funding and others who believe opposing it is both politically and economically foolish.

In The Hill, former Trump economic advisor Stephen Moore and Forbes editor-in-chief Steve Forbes said additional funding was a fool’s errand.

“One of President Biden’s worst — and most unpopular — ideas is to double the size of the Internal Revenue Service by adding $80 billion to its budget and hiring as many as 85,000 more auditors and agents,” they wrote. “The White House predicts this will collect hundreds of billions of dollars in alleged unpaid taxes. More tax snoops. More audits. This sounds like as much fun as a proctology exam. It’s the kind of proposal only tax accountants, tax lawyers and D.C. lobbyists could love.

“What makes the IRS expansion doubly foolish is that the $2.3 trillion Biden tax plan would not just raise personal income, corporate, estate tax and payroll tax rates, but it would add more loopholes and tax shelters to the 30,000-page tax code,” they wrote. “The Biden team keeps referring to this as ‘tax reform,’ but it is the opposite of that. True tax reform should be based on two principles that not long ago were universally accepted by Democrats and Republicans. First, keep tax rates as low as possible to reduce the economic distortions and disincentives of the tax code. Second, broaden the tax base by eliminating the hundreds of special-interest loopholes to make the tax system fairer.”

The Wall Street Journal editorial board said the case for this “revenue miracle” comes from a dubious study done by economist Lawrence Summers.

“We’re supposed to believe that if the IRS could audit every taxpayer who reports income of $5 million or more a year, the government would see a revenue gusher,” the board said. “But is that plausible? It makes little sense that millions of Americans are willfully violating the tax code. The costs are too high if they’re caught. People who make $5 million a year hire lawyers and accountants to exploit legal means in the IRS code to minimize their tax liability. The ProPublica data dump on the tax information of rich Americans, illegally stolen or leaked from the IRS, has turned up no illegal tax evasion we can see.

“Audits of the rich have fallen in recent years, and more audits are bound to yield some additional revenue,” they added. “Forty billion dollars will hire a lot more agents. But to get anywhere close to the $100 billion in the bipartisan spending deal, the IRS will have to audit nearly every high-income taxpayer in the country. And that means harassing tens of millions of taxpayers over every deduction they’ve taken…Is this really what Republicans want their fingerprints on: Hugely expanding the size of the IRS so it can harass entrepreneurs and pass-through business owners who provide millions of jobs?… Congress would do less economic harm by dropping the provision to harass honest taxpayers by supersizing the IRS and simply adding the $100 billion to the deficit. The revenue is probably a bipartisan illusion in any case.”

But in Bloomberg, Michael Strain said congressional Republicans “are leaving hundreds of billions of dollars on the table each year and undermining the rule of law.”

“All told, the department estimates that the gap between federal taxes owed and taxes voluntarily paid on time amounted to $630 billion that year, in line with the annual tax gap over the past decade,” he wrote. “Through enforcement activities and late payments, the IRS captured some of these outstanding funds. But its audits were as likely to target low-income people with minimal tax liabilities as the top 1% of earners. That’s morally problematic as well as fiscally irresponsible.

“According to the Treasury, in 2019, $554 billion of taxes owed were never paid or collected. This amounts to 15.2% of what the government would have received if everyone paid their tax bills. This is serious money. To put it in context, the entire 5-year cost of President Joe Biden’s proposed child allowance amounts to $435 billion, according to a recent analysis by Moody’s Analytics. Biden’s climate-change plans would cost around $480 billion over 10 years. More IRS funding would help close the tax gap. The IRS needs additional resources to hire tax auditors and others who contribute to enforcement and to invest in information technology.”

From the left.

The left was outraged that Republicans balked at the deal, saying they were defending tax cheats and missing an opportunity for bipartisan reform.

In Slate, Jordan Weismann said Republicans “have taken a brave stand in defense of tax cheats.”

“In a healthy two-party system where both sides believed in basic good government, financing new spending by improving tax enforcement would be an uncontroversial and common-sense proposal,” Weismann said. “It is, after all, a more or less free lunch that merely involves enforcing the laws as they exist. It’s a potentially large meal, too. Though estimates vary, IRS Commissioner Charles Rettig testified earlier this year that the government may be failing to collect more than $1 trillion of the taxes it is owed annually, up from the previous official estimate of $441 billion per year on average between 2011 and 2013. Even a portion of the missing revenue could pay for a lot of new roads.

“But, alas, we do not live in a healthy two-party system where both sides believe in basic good governance,” he wrote. “Part of the reason so much tax revenue slips through Uncle Sam’s fingers every year is that Republicans have spent two decades waging an on-and-off war of attrition aimed at limiting the IRS’s powers and starving it of resources, which has ultimately crippled its ability to conduct tax audits on all but the poorest filers. As New York Magazine’s Jonathan Chait has explained at length, conservatives have justified this assault based on a series of literally made-up scandals.”

In Salon, Jake Johnson said Republicans caved “under pressure from well-heeled conservative advocacy organizations and donors.”

“Due to persistent funding shortages and inadequate staffing, the IRS now audits poor Americans at roughly the same rate as the wealthy, who often use complex strategies to avoid paying taxes,” Johnson said. “Big businesses are also taking advantage of the depleted IRS; the agency now audits just half of all large company tax returns, allowing corporations to claim unwarranted tax breaks… It's unsurprising that Republicans are not enthusiastic about boosting IRS funding, given that their party is responsible for the 20% decline in the agency's budget between 2010 and 2018.”

In The New York Times, Paul Krugman asked if “only the little people” should pay taxes.

“I’m not surprised to learn that a significant number of senators are sympathetic to the interests of wealthy tax cheats, that they are objectively pro-tax evasion,” Krugman said. “I am, however, surprised that they are willing to be so open about their sympathies. There is, after all, a big difference between arguing for low taxes on the rich and arguing, in effect, that rich people who don’t pay what they legally owe should be allowed to get away with it.

“For one thing, I don’t think even right-wingers would dare make the usual arguments for low tax rates, dubious as those arguments are, on behalf of tax evasion,” Krugman said. “Who would seriously claim that the only thing keeping ‘job creators’ going is their belief that they can dodge the taxes the law says they should pay? And who’s the constituency here? When a millionaire or billionaire evades taxes, this comes at everyone else’s expense: A bigger budget deficit might mean less room for social spending, but it also means less room for legal tax cuts. So everyone should be in favor of cracking down on tax cheats — everyone, that is, except the tax cheats themselves… And these opportunities to hide income are concentrated at the top; one recent estimate is that more than 20 percent of the income of the top 1 percent goes unreported. So how can anyone justify failing to crack down on these abuses?”

My take.

I’m torn between one emotional response, in which my view resonates much more with the right than the left, and one more analytical response, in which my view resonates more with the left than the right.

Emotionally, giving the IRS more funding sounds like a terrible idea. Conservatives are right that tax enforcement has been a tool of bipartisan harassment for years, and while some of the Republican claims of targeting have been debunked or are overblown, it’s absolutely true that it has been used as a political weapon throughout history. Even in his piece criticizing many of the Republican claims of targeting, Jonathan Chait admits as much. At the same time, liberals are correct that right now, the IRS is targeting low-income Americans just as often as high-income Americans (which defenders of the IRS say is thanks to a lack of resources). To me, though, that fact is not a good enough reason to give the IRS more money if they are going to continue to target more “regular” folks.

There’s also the fact that our tax system is burdensome, complicated, and arduous. I’m a political reporter who covers this stuff for a living, and I often struggle to understand why I’m paying for what and where my money is going. Reading Moore and Forbes’ opinion piece resonates with me. The best answer is a simpler tax system where we’re paying a flat, simple fee, with fewer loopholes, and collecting more revenue. How could anyone argue with that being the best solution on the table?

Analytically, though, there seems to be a good deal of evidence that this proposal would have helped increase revenue. Given that we’re not analyzing a proposal to change the tax system, Moore and Forbes’ argument is mostly a distraction. The question should be simpler: do we want more people abiding by tax laws? And would additional funding accomplish that goal? The Wall Street Journal simply waves its hand at the study conducted by Summers and two co-authors, dismissing it by asking “is that plausible?” and then offering no counterpoints or criticisms about how the study was conducted. Maybe the board wants the study to be bunk, but they don’t make any case that it actually is, which is a telling omission from a typically sharp editorial board.

Importantly, Summers’ study is backed up by many others. Throw a stone and you can hit a study from economists showing how much money the IRS misses out on each year, but the range is generally between $400 billion and $1 trillion. $400 billion! That’s probably why Republicans in Congress initially got behind this bill — they sensed the political winds shifting on the IRS, and realized that after Trump sought to increase its funding late in his presidency there was very little political cost for doing so. Most Americans view the agency’s shortcomings as most beneficial for the rich.

Instead of cheers, though, Republicans have been met with organized conservative opposition. And that’s the rub. Right now, our political alignment has a lot of small and mid-sized business owners who are funding and supporting Republicans in critical swing states. Many of them are members of the groups that pushed Republicans to drop their support of this bill, and that threat was enough for Republicans to balk — even though a few weeks ago they understood this was a smart way to pay for something Americans wanted (infrastructure repairs). The motivations of this voting bloc are not a mystery: they don’t want to be audited, they don’t want to be bothered, they simply want lower, simpler taxes and probably less ardently enforced tax laws. It’s not a hard position to understand.

So the numbers haven’t changed. Nor have the projected returns. Sen. Portman said as much: his two reasons for balking were pushback from the right and rumors that Democrats were going to tack on IRS enforcement funding to a reconciliation bill that doesn’t yet exist and may not make it through Congress anyway. But he has not argued that this is a bad way to collect revenue or that the calculations have moved. To me, that means the main reason for scrapping this is right-wing pushback from a concentrated group of donors, and the auxiliary excuse is press reports that the IRS funding may happen anyway.

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