Moneybox

Farewell, Years-Long GOP Effort to Help the Wealthy Not Pay Taxes

One of the biggest wins in the Democrats’ inflation bill is a supercharged IRS.

WASHINGTON, DC - APRIL 27: The Internal Revenue Service headquarters building appeared to be mostly empty April 27, 2020 in the Federal Triangle section of Washington, DC. The IRS called about 10,000 volunteer employees back to work Monday at 10 of its mission critical locations to work on taxpayer correspondence, handling tax documents, taking telephone calls and other actions related to the tax filing season. (Photo by Chip Somodevilla/Getty Images)
The tax police have the green light. Chip Somodevilla/Getty Images

They did it: Senate Democrats have finally passed a reconciliation package after more than a year of negotiations. Gone are one-time priorities like child care and housing; Americans will have to settle for the country’s largest ever investment in fighting climate change, plus some important strides toward lowering health care costs.

Republicans still managed to strip out a $35 price cap on the cost of insulin for patients with health insurance, and Sen. Kyrsten Sinema lobbied to remove tax increases on private-equity barons. But one key, if overlooked, piece of the bill remained intact after all the debates and amendments were over: about $80 billion in new funding for the Internal Revenue Service. What it means is that for the next decade the agency can do a better job going after wealthy tax cheats and collecting revenues the government is supposed to be recouping anyway.

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That kind of funding can’t come a moment too soon. The IRS has been an easy punching bag for decades. No one really enjoys paying taxes, particularly in a country that doesn’t make it particularly easy, and the taxman gets little love. Republicans have been successful in playing off that resentment to starve the agency’s budget, forcing it to fall by $2 billion between 2010 and 2017. Less money means less staff capacity, and the IRS lost 15 percent of its employees on net between 2010 and 2020, with a 40 percent drop in key enforcement personnel. By 2017 it had just 9,510 auditors, a third lower than 2010.

In that same time the country has grown, as have the IRS’s mandates. The last time it had so few auditors was 1953, when the population and economy were both far smaller. Then the agency had to take on administering the tax aspects of the Affordable Care Act and roll out the 2017 Republican tax cuts with its skeleton crew.

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With so little manpower and funding, the IRS can’t do its job. Tax audits fell by 675,000 between 2010 and 2017, a 42 percent decline, and by 2019 they reached a 40-year low. New investigations of people who don’t file their taxes at all fell from 2.4 million in 2011 to just 362,000 in 2017. The gap between what the agency should have collected in taxes and what it actually brought in from 2011 to 2013 was $441 billion. IRS Commissioner Charles Rettig recently told the Senate Finance Committee that the gap may now exceed $1 trillion a year.

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A shrinking budget has also skewed the agency’s priorities. The wealthy are far more likely to misreport their income on their taxes, but audits for the richest have been falling far faster than for those earning the least. Millionaires were 80 percent less likely to be audited in 2018 than they were in 2011. Audit rates for the richest 1 percent and Earned Income Tax Credit recipients—Americans who usually earn less than $20,000 a year—actually converged by 2019. The audits, when they do happen, have also become less intensive without enough qualified staff on hand to carry them out. Audits of millionaires recouped just $1.9 billion in 2018, down from $5.1 billion in 2010.

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Setting the IRS up to be able to carry out its mandate isn’t just about collecting the taxes that are due under today’s code, though. An important way to fight income inequality is to increase taxes on the rich and use the money to pay for services all of us need. But raising taxes on paper means little if the wealthy are able to skirt the rules and don’t pay up what they owe.

For instance, when campaigning for the White House in 2020, Sen. Elizabeth Warren unveiled a groundbreaking tax not on income but on wealth, which would have levied a 2 percent tax on household net worth above $50 million and 6 percent above $1 billion. She argued it would cut down on wealth inequality while raising $3.75 trillion in the span of a decade, which would have gone to funding things like her universal childcare proposal. But a different analysis by the Penn-Wharton Budget Model found it would only raise about $2.7 trillion once “forgone revenues due to tax avoidance” were taken into account, a third less than what she had hoped for.

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There’s little sense in passing major overhauls of the tax code to make it fairer and reduce income inequality if no one’s around to actually enforce those changes. It would be easier to sell a system-changing tax increase on the wealthy and far more feasible to implement it if the IRS were already doing a good job at collecting the taxes that currently exist.

Republicans, despite claiming to be the party of law and order, have aided and abetted tax cheats for years. That collective scam is about to come to an end. If Congress can keep itself from cutting the IRS’s budget over the next decade, the new money from the Inflation Reduction Act will increase its funding by 50 percent. The agency is already pledging to put the money to use going after rich tax cheats. Officials have promised that they won’t increase audit rates on anyone making less than $400,000, but that they will finally be able to ramp up enforcement, particularly on the kinds of income that allow the rich to evade taxes now, such as through partnerships and capital gains returns.

The Congressional Budget Office predicts that the new funding will increase tax revenue collection by $204 billion over 10 years—an excellent return on an $80 billion investment. It’s not just a sign of how much we’ve left on the table by letting the IRS wither. It shows that, if given the right resources, the agency could be a powerful tool in fighting inequality.

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