I'll be happy to eat crow on this if I am wrong, but I am highly skeptical of increased enforcement leading to significant gains in revenue. The first thing to look at is the IRS' current audit reports.
Going back to the 2015 tax year where audits are mostly complete, we see the IRS was at somewhere around 23 Billion in recommended additional tax dollars (16 billion for individuals; 7 billion for corporations). Things you should notice looking through the years is that auditing the big boys is not where the money is, even when some 7-8% of big returns are audited. The places with bang for the buck are (1) the people who report no income; (2) people who report 0-25k income; and (3) people who claim refundable earned income tax credits.
Next you can look at the corporate returns. It varies from year-to-year, but the $20 Billion+ is generally the highest in additional dollars owed. But the thing is the that 55-80% of big returns are audited, so there isn't much more juice to squeeze out of those returns. The additional money squeezed out of small businesses which are audited at a lower rate is pretty weak, around 36k a pop per audit with something under 1% of returns examined.
So why is this a problem? The IRS thinks that 80% of the tax gap lives in under reporting of income, with 56% of the under reporting being in individual income tax (13% non business income; 25% business income, 16 percent employment taxes [looking at you Michael Avenatti] 10% credits, and a bunch of miscellaneous stuff). It's also worth noting that as part of measuring the tax gap, the IRS assumes that it is bad at auditing and tosses another 10% on top as a estimate of the undetected lost income which presumably wouldn't be caught if they can't catch it on the returns that they do audit. But long story short, there is nothing in the published numbers that suggests there is an easy enforcement road to collecting additional tax dollars. The easy stuff is already found, and the grind will be combing through more of the no income, low income and EIC returns.
Finally, I would note that promised estimated tax collection through vigorous enforcement has absolutely bombed previously. FATCA turned the world banks into reporters on Americans and gave them a giant burden on tax filing. Even after paring down, FACTA was promised to bring in 8.7 billion over ten years. The actual number? 300 million [edit: a year to start, and then decreasing] .
Jason Furman should have stuck to his weariness, there is no free lunch just hanging out in uncollected tax revenue. I hope I'm wrong, but it just doesn't pass the smell test.
What about the other parts of the bill related to US energy? Nuclear mini-reactors- will they be labeled green? new pipelines in WV...increased drilling leases...there is a whole lot going on.
I feel like the fundamental problem with revenue-through-enforcement is that the US already has fairly high voluntary compliance rates. It's unclear how much higher it can really get unless we've been measuring the tax gap completely wrong for decades.
Isn't the bigger question whether it can actually pass? Manchin has made it clear that his vote is contingent upon passing a separate piece of legislation easing the regulatory burden on energy companies seeking to expand their operations. That would seem to be something that cannot be done through the reconciliation process, and it seems to me the Republicans would refuse to pass it (even though they'd be in favor of it in a vacuum) to prevent Manchin from voting for the IRA. Am I wrong? If not, why isn't anyone talking about this? EDIT: I see there is a WSJ editorial today addressing this exact point, although they're approaching it from the point of view of being doubtful all Democrats in the House will support it. Either way, it's hard to see it happening.
If I was the Republicans I would tie any further IRS funding to figuring out who leaked the CEO tax details last year (2 years ago?). All govt bureaucracies are slowly becoming progressive activist organizations. Without any oversight, it's essentially writing a giant check to your political enemies. I expect a lot of "leaks" that are highly favorable to Democratic policy concerns in the future.
The Big Question About The Inflation Reduction Act: How Well Will Added Tax Enforcement Work?
I'll be happy to eat crow on this if I am wrong, but I am highly skeptical of increased enforcement leading to significant gains in revenue. The first thing to look at is the IRS' current audit reports.
https://www.irs.gov/pub/irs-soi/21dbs03t17ex.xlsx
Going back to the 2015 tax year where audits are mostly complete, we see the IRS was at somewhere around 23 Billion in recommended additional tax dollars (16 billion for individuals; 7 billion for corporations). Things you should notice looking through the years is that auditing the big boys is not where the money is, even when some 7-8% of big returns are audited. The places with bang for the buck are (1) the people who report no income; (2) people who report 0-25k income; and (3) people who claim refundable earned income tax credits.
Next you can look at the corporate returns. It varies from year-to-year, but the $20 Billion+ is generally the highest in additional dollars owed. But the thing is the that 55-80% of big returns are audited, so there isn't much more juice to squeeze out of those returns. The additional money squeezed out of small businesses which are audited at a lower rate is pretty weak, around 36k a pop per audit with something under 1% of returns examined.
So why is this a problem? The IRS thinks that 80% of the tax gap lives in under reporting of income, with 56% of the under reporting being in individual income tax (13% non business income; 25% business income, 16 percent employment taxes [looking at you Michael Avenatti] 10% credits, and a bunch of miscellaneous stuff). It's also worth noting that as part of measuring the tax gap, the IRS assumes that it is bad at auditing and tosses another 10% on top as a estimate of the undetected lost income which presumably wouldn't be caught if they can't catch it on the returns that they do audit. But long story short, there is nothing in the published numbers that suggests there is an easy enforcement road to collecting additional tax dollars. The easy stuff is already found, and the grind will be combing through more of the no income, low income and EIC returns.
https://www.irs.gov/pub/irs-pdf/p1415.pdf
Finally, I would note that promised estimated tax collection through vigorous enforcement has absolutely bombed previously. FATCA turned the world banks into reporters on Americans and gave them a giant burden on tax filing. Even after paring down, FACTA was promised to bring in 8.7 billion over ten years. The actual number? 300 million [edit: a year to start, and then decreasing] .
https://reason.com/2021/06/09/biden-wont-close-the-tax-gap-but-he-will-snoop-on-your-bank-records/
Jason Furman should have stuck to his weariness, there is no free lunch just hanging out in uncollected tax revenue. I hope I'm wrong, but it just doesn't pass the smell test.
What about the other parts of the bill related to US energy? Nuclear mini-reactors- will they be labeled green? new pipelines in WV...increased drilling leases...there is a whole lot going on.
I feel like the fundamental problem with revenue-through-enforcement is that the US already has fairly high voluntary compliance rates. It's unclear how much higher it can really get unless we've been measuring the tax gap completely wrong for decades.
Isn't the bigger question whether it can actually pass? Manchin has made it clear that his vote is contingent upon passing a separate piece of legislation easing the regulatory burden on energy companies seeking to expand their operations. That would seem to be something that cannot be done through the reconciliation process, and it seems to me the Republicans would refuse to pass it (even though they'd be in favor of it in a vacuum) to prevent Manchin from voting for the IRA. Am I wrong? If not, why isn't anyone talking about this? EDIT: I see there is a WSJ editorial today addressing this exact point, although they're approaching it from the point of view of being doubtful all Democrats in the House will support it. Either way, it's hard to see it happening.
If I was the Republicans I would tie any further IRS funding to figuring out who leaked the CEO tax details last year (2 years ago?). All govt bureaucracies are slowly becoming progressive activist organizations. Without any oversight, it's essentially writing a giant check to your political enemies. I expect a lot of "leaks" that are highly favorable to Democratic policy concerns in the future.
Tough to find as through and smart commentary as this anywhere else. Thanks Josh.
None of this seems necessary