Column: Tax provisions may be Democrats’ most unexpected victory in the inflation bill
The budget reconciliation bill just passed by the Senate and heading for final congressional approval offers dramatic improvements in American policies aimed at fighting global warming and improving healthcare.
There’s too much in this legislative smorgasbord that Democrats have dubbed the Inflation Reduction Act to cover in one sitting, so I’ll focus on one topic that’s sure to interest almost everybody: taxes.
The measure addresses tax policy in two major ways. One is a steep increase in funding for the Internal Revenue Service.
These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans.
— IRS Commissioner Charles Rettig, assuring the Senate that he’ll use agency funding to go after rich tax avoiders
The IRS has been on a congressionally imposed starvation diet virtually since the 1970s, which has been a get-out-of-paying ticket for corporations and the wealthy for all that time.
Scoffing at the tax laws won’t be so easy for them going forward, because the act almost doubles the IRS budget, providing $80 billion in new funds over the next 10 years.
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The second provision imposes a minimum income tax of 15% on the nation’s richest corporations, specifically those reporting profits of $1 billion a year, beginning in 2023. The measure also imposes a 1% tax on stock buybacks, also starting next year.
More on the corporate tax in a moment. First, let’s examine the importance of the new IRS funding, which would partially go toward hiring as many as 87,000 new agents and other employees.
The sheer scale of the funding and workforce increase has made anti-tax conservatives’ heads explode. “Why would Congress, in one bill, increase the IRS workforce by something like 92%?†asks Byron York of the Washington Examiner. “It doesn’t seem possible. It certainly doesn’t seem wise.â€
You might ask: “Why not?†York has an answer, though it certainly doesn’t seem cogent. He asserts that the increase is based on the idea “that Americans are evading all sorts of taxes, creating a ‘tax gap,’†the difference between taxes owed and taxes paid.
“The Biden administration says tax cheats are primarily ‘high-income,’†York writes. Well, not the Biden administration alone. The conclusion has also come from economists at the IRS, Carnegie Mellon University and UC Berkeley, who showed last year that America’s tax-cheats-in-chief are the 1%, who consistently concealed as much as 21% of their income from tax collectors.
Of the unreported income, about 6 percentage points is hidden by “sophisticated evasion that goes undetected in random audits,†their paper said.
Improving Social Security is a matter of political will, not affordability.
York and his conservative fellows have been attacking the IRS funding by suggesting that the army of some 80,000 new agents and other employees will turn their firepower on middle- and upper-middle-class Americans and small businesses, not on the wealthy. But that’s just scare-mongering.
IRS Commissioner Charles P. Rettig assured senators in an Aug. 4 letter that the IRS would honor its directive from the Biden White House not to raise audit rates on taxpayers making less than $400,000 a year.
Regarding the funding and workforce increases, he wrote: “These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans,†but for targeting “large corporate and high-net-worth taxpayers [who] often engage teams of sophisticated representatives who pursue unsettled or sometimes questionable interpretations of tax law.â€
That’s where the money is. The Congressional Budget Office has estimated that the new IRS funding could produce more than $200 billion in higher collections over the next decade, or about $2.55 in gain for every dollar spent.
Others say the CBO was thinking too small. “The benefit could be $500 billion or even possibly, if they do a great job, $1 trillion,†former Treasury Secretary Lawrence Summers said on Bloomberg Television last week. “I’m pretty optimistic about the fiscal potential here if the administration really steps up.â€
The IRS budget has long come under pressure in part because of a series of fabricated scandals designed to undermine its credibility. Remember the 2012-13 version promoted by Rep. Darrell Issa? His claim was that the agency had targeted conservative nonprofit groups for special scrutiny at the behest of the Obama White House.
Turned out that this didn’t happen — the agency was trying to be tough on all nonprofits that were breaching the tax law by engaging in political activities, and was even tougher on progressive organizations.
But Issa achieved his and his conservative pals’ real goal, which was to intimidate the IRS out of enforcing the nonprofit rules at all. The agency’s budget was collateral damage — the Republican-controlled Congress gutted its budget in 2014, appropriating $1.5 billion less than what the Obama administration had requested.
David Weil would have enforced federal labor law leading the Labor Department’s Wage and Hour Division, so Republicans killed his nomination.
Each budget cut, whether measured in real or inflation-adjusted dollars, hamstrung the agency’s ability to do its job. Taxpayer services shrank, callers with even ordinary questions were placed on hours-long holds — if they could get through at all. This lowered the agency’s public reputation to a subterranean level.
Who benefited? The rich, that’s who. Audits of the wealthy became an endangered species. In 2010, the audit rate of personal tax returns reporting income of $10 million or more was 21.2%. By 2019, the Government Accountability Office reported, it had fallen to 3.9%. This in a period when the number of those returns nearly doubled, rising from 13,000 to 24,000.
The low water mark may have been reached in 2019, when the IRS received more than 23,450 tax returns from households reporting $10 million or more in income for 2018. It audited seven. (Not a misprint.)
The trend toward lower audit rates was seen in almost every income segment, but of course the opportunity for tax avoidance and evasion is greater at the top — the wealthy tend to receive more of their income from sources that need to be reported voluntarily, such as investment gains, rather than from wages, which are reported by employers.
President Biden’s proposal for a new tax on billionaires is great for the middle and working classes.
At this moment, Rettig told the senators, “the IRS has fewer front-line, experienced examiners in the field than at any time since World War II, and fewer employees than at any time since the 1970s.â€
The impact on enforcement is direct, he wrote, because examining the returns of wealthy individuals requires specialized skills and experience that the agency can’t bring to bear. “As a result,†he wrote, “the IRS has for too long been unable to pursue meaningful, impactful examinations of large corporate and high net worth taxpayers to ensure they are paying their fair share.â€
That brings us to the second key tax provision in the reconciliation measure, the corporate minimum tax. This has also come under fire from agents for the rich and corporate managements, such as the American Institute of Certified Public Accountants.
The minimum tax is aimed at some of the scores of rich corporations paying zero in federal taxes — 55 of them in 2020, according to research by the Institute on Taxation and Economic Policy. These companies aren’t necessarily breaking the law; they’re just taking advantage of tax loopholes begging to be closed. The reconciliation act’s drafters say the tax will apply to 150 to 200 corporations.
What seems to stick in the craw of corporate taxpayers most about this provision is how it defines income.
Rather than allowing corporate taxpayers to apply all the myriad tax breaks that make income reportable to the IRS disappear — such as research credits, meal and entertainment expenses, net operating losses carried forward into later years and so on — the minimum tax will be based on the profit that a company declares to its shareholders. That’s known as “book†or “financial statement†income and is typically much higher.
Companies like to minimize what they report to the IRS and maximize what they report to shareholders; now those subject to the minimum tax will have to give the same number to both.
The IRS has been systematically impoverished by conservatives in Congress — no wonder its service stinks.
The accounting profession is scandalized by the very idea. The American Institute of Certified Public Accountants says the principle “violates numerous elements of good tax policy and may result in unintended consequences,†although it would seem that the main consequence, which is higher tax collections from corporations, is quite openly intended by the drafters of the act.
The organization asserts that “imposing tax according to financial statement income takes the definition of taxable income out of Congress’ hands and puts it into the hands of industry regulators.... Public policy taxation goals should not have a role in influencing accounting standards or the resulting financial reporting.â€
This point is a little hard to parse. Accounting standards don’t arrive on the wings of a dove or derive from natural forces; they’re based on what the law requires.
In this case, the law requires that the same standards will apply to financial disclosures filed with the Securities and Exchange Commission and the tax returns filed with the IRS. Both reports tend to be overseen by CPAs, so where’s the problem?
Another sheaf of complaints was issued by the National Taxpayers Union, an anti-tax think tank. The NTU grouses that raising taxes by an estimated $260 billion to $313 billion over 10 years is a mistake when the economy “may already be in a recession or soon tipping into one.â€
Leaving aside that whether the economy is at risk of a recession seems to be a doubtful proposition just yet, the tax bite is at best a “nibble.†That’s the term used by Princeton economist Alan Blinder, a former vice chairman of the Federal Reserve, in a Wall Street Journal opinion piece rebutting the hand-wringing about the minimum tax sounded by, among others, the Wall Street Journal editorial board.
Not only is the proposed tax increase tiny, Blinder wrote, but to the extent it affects corporate decision-making, it will prompt companies to use “more labor, not less.†Good for job growth, in other words.
“You’ll probably need a magnifying glass to see any damage to investment or jobs, and any such damage will surely be dwarfed by the bill’s job-creating provisions on climate change and prescription drugs,†Blinder wrote.
None of this will keep Republicans and conservatives from attacking the reconciliation bill with smoke, mirrors and persiflage. But the salient point remains that the bill represents a major advance in policies that help all Americans, not merely corporations and the wealthy. In its own way, it’s a new deal.
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