WASHINGTON — Democrats have abandoned their dreams of higher tax rates for individuals and corporations, settling instead for a minimal corporate tax and tougher enforcement of existing laws.
But the mere suggestion that the Internal Revenue Service crack down on tax evasion drew a fierce backlash from Republicans.
“They’re just going to go after every business person,” Sen. Rick Scott (R-Fla.) told HuffPost. “We know how the IRS treats people. You’re guilty until proven innocent.”
The Inflation Reduction Act, which Democrats hope to push through the Senate without Republican votes this month, would boost the IRS budget by $80 billion, with more than half of that going to enforcement and 3 billions of dollars for improved customer service.
“This is an agency that was only able to answer about one in 50 phone calls during the 2021 tax season,” Sen. John Thune (RS.D.) said on the Senate floor Tuesday. “Yet 4% of the $80 billion goes to taxpayer services – 57% goes to enforcement so the IRS can spend more time harassing taxpayers in this country.”
The US relies on voluntary compliance with its tax code, and the American people collectively underpay their taxes by hundreds of billions a year. Much of the so-called tax gap arises from people reporting non-wage income, such as from sole proprietorships or business partnerships. (Regular employees usually report their income directly to the IRS, and federal income taxes are withheld from their paychecks.)
Since there is so much tax noncompliance, including willful tax evasion, tougher IRS enforcement more than pays for itself. The $80 billion investment in the IRS will generate $207 billion in revenue over 10 years, according to the Congressional Budget Office.
Sen. Mike Crapo (R-Idaho), the top Republican on the Senate Tax Committee, has said that making people pay taxes they already owe is tantamount to raising their taxes. Him too he argued this week in a press release that the proposal would unfairly burden lower-income earners, since congressional tax analysts have estimated that people earning less than $100,000 account for a large portion of unreported business income.
“Referring to all tax loopholes and misreporting numbers as resulting from ‘tax cheats’ is misdirection, as significant sums are generated by hard-working taxpayers who are simply struggling to comply with an overly complex tax code that will only become more complicated if the latest tax and spending bill becomes law,” Crapo said in the statement.
Tax experts agree that some of the tax loophole comes from ambiguities in the tax code and honest mistakes, but they don’t agree that increasing IRS enforcement would be a bad thing.
Marc Goldwein, an economist at the Committee for a Responsible Federal Budget, said making people pay what they owe is not the same as raising their taxes.
“Every president from Ronald Reagan to Donald Trump has advocated for more IRS funding to close the tax gap,” Goldwein said.
The main tax increase in the Democrats’ bill is a 15 percent minimum tax on about 200 companies with more than $1 billion in profits, projected to raise about $313 billion over a decade. Economists have said that some of the corporate tax burden is passed on to workers instead of shareholders, leading Republicans to describe any corporate tax increase as a tax on workers, even though it is not a direct tax increase on households.
Republicans’ sympathy for potential tax dodgers stands out in light of longtime Republicans support for stricter IRS enforcement against people claiming low-income tax credits, but it’s in line with Republicans’ longstanding dislike of the IRS itself. During Barack Obama’s administration, Republicans railed against the IRS for alleged unfair treatment of conservative groups seeking tax-exempt status. (It turned out the agency had liberal groupsvery.)
Largely as a result of the anti-IRS stance on Capitol Hill, the agency’s budget has been cut 23% since 2010, even as the IRS has taken on new responsibilities, such as distributing economic impact payments and child tax credit payments during the pandemic of the coronavirus.
However, the idea that tougher IRS enforcement would disproportionately burden people with modest incomes is questionable, as the agency would likely want to prioritize audits with net income for the government. And the Ministry of Finance has is appreciated that the vast majority of undeclared business income comes from people earning more than $100,000 a year.
“The goal should also be to improve productivity and reduce the burden on compliant taxpayers,” said Janet Holtzblatt, senior fellow at the Urban-Brookings Tax Policy Center. “If the IRS can use the funding to increase audits of non-compliant individuals and also increase the ability to successfully audit cases involving more complex tax issues, then I think it’s a win-win for the government and taxpayers.” .