Yves here. Because I have been too busy to do the topic justice, I am late to turn to the kerfluffle about the increased funding for the IRS and the belief that the agency will be able to harvest oodles more in tax dollars.
First, understand that the IRS is hated by Republicans and so some of the big-seeming personnel increase is catchup for the impact of years of underfunding. And well over half of the new hires are going to be for support functions like customer service and IT.
Second, the agency is geriatric and expecting a lot of retirements in the next five years. So many of the headline new hires are to replace expected departures.
Third, the IRS needs to looks like it can fund its own increased spending and cover some of the IRA costs. Larry Summers has been in the vanguard of pushing a theoretical calculation of undercollection called the tax gap. As we hope to address longer form, people in tax think the economists’ tax gap estimates are fantasy-land high.
By Nirupama Rao, Assistant Professor of Business Economics and Public Policy, University of Michigan. Originally published at The Conversation
The U.S. is about to spend US$490 billion over 10 years on reducing greenhouse gas emissions, improving health care and reducing the federal deficit. Where’s all that money coming from?
We asked University of Michigan economist Nirupama Raoto examine how the new law will raise enough revenue to pay for clean energy tax credits, Affordable Care Act subsidies and incentives for manufacturers to use cleaner technologies, among other initiatives. We also wanted to know, given its name, will the Inflation Reduction Act actually bring down inflation?
What Are the Main Revenue Components in the Bill?
The new law funds itself primarily through a mixture of tax-related measures and health care savings. In fact, the revenue it’s projected to raise more than pays for the new spending, reducing the deficit by roughly a quarter of a trillion dollars over 10 years.
The biggest source of revenue, projected by the Joint Committee on Taxation at about $222 billion, comes from a new 15% minimum corporate tax rate. Another $124 billion in net revenue is expected as a result of stepped-up tax enforcement by the Internal Revenue Service. The committee expects two other tax measures – including a 1% tax on corporate stock buybacks – would raise about $126 billion.
Congress is also hoping to save $265 billion through several provisions to lower the amount of money the government spends on prescription drugs through its Medicare program.
How Will the Corporate Minimum Tax Work?
The corporate minimum tax is aimed at raising revenue from companies that report large profits to their shareholders but pay minimal taxes.
Though businesses can, of course, owe no tax because of perfectly legitimate uses of the tax code, seeing headlines about successful companies paying little to no tax has been galling to many Americans and can potentially undermine the public’s faith in the tax system.
In addition, government revenue from companies has plunged in recent years as a result of the 2017 corporate tax cut and other measures. Corporate tax revenue fell by nearly half as a share of gross domestic product from 2015 to 2020.
To be subject to the minimum tax, U.S. corporations must earn an average of at least $1 billion in adjusted book income – the earnings they report to shareholders less some adjustments – over the previous three years. It hits foreign companies too, though they need only report $100 million in U.S. income.
Basically, companies subject to the minimum will have to calculate their tax liability twice – once under regular corporate income tax rules and again by multiplying their adjusted book income by 15%. Their tax is whichever is greater. Theoretically, this ensures they at least pay the minimum.
A few important adjustments included in the bill’s final language will limit how much companies pay under the minimum tax. To prevent manufacturers from facing high minimum tax bills, for example, companies will be able to employ some of the same credits and deductions they use to reduce their regular corporate tax bills to lower the minimum tax they’ll pay as well.
While an earlier vision of the bill would have subjected private equity funds to the minimum tax, intense lobbying of Arizona Sen. Kyrsten Sinema helped the industry get an exemption, along with retaining the carried interest loophole that the bill initially closed.
In the end, fewer than 150 companies– including many household names like Amazon, AT&T and General Motors– are expected to be subject to the tax.
How Will IRS Enforcement Generate So Much Revenue?
The law allots $80 billion in new funding for the Internal Revenue Service. The Joint Committee on Taxation expects the investment to garner $204 billion in revenue over 10 years, or $124 billion once you subtract the increased spending.
The main target of this spending is the so-called tax gap, which is currently estimated at about $600 billion a year. The tax gap is the difference between how much corporate or individual taxpayers owe the IRS and how much the agency is able to collect.
The new revenue is expected to come from increased auditing, mostly targeting high-income taxpayers. Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig have both pledged that the investments will not lift audit rates on small businesses and households earning less than $400,000 a year.
Many Democrats, along with former Treasury Secretary Larry Summers, believe this investment in the IRS will raise a lot more money than estimated because of better compliance among taxpayers who want to avoid being audited.
The funding will also be used to update antiquated technology and increase the IRS’s staff. Decadesold computer systems and understaffing prevent the IRS from answering taxpayer queries, tracking funds owed and using simple analytics to guide enforcement.
While an $80 billion investment that returns $204 billion already sounds pretty impressive, it may be possible that it’s a conservative estimate.
Will the Law Reduce Inflation, as the Name Implies?
Probably not much.
Several measures in the law, such as narrowing the deficit, lowering drug prices and making the U.S. less vulnerable to energy price spikes, should all help reduce inflation somewhat.
Though monetary policy is the main tool for fighting inflation, it’s also possible that the new law will convince people that Congress is functional and willing to take steps to address inflation, and that feeling could lead to lower expectations for future inflation, which can be a self-fulfilling prophesy.
However, the magnitude of the direct impact on inflation, despite the bill’s name, will likely be slight. The Penn-Wharton Budget Model, which publishes economic analysis on the fiscal impact of public policy, suggests that the reduction in inflation of the Inflation Reduction Act “will be statistically indistinguishable from zero.”
That’s an economist’s way of saying, when it comes to the bill’s impact on inflation, don’t get your hopes up too much.
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“Though monetary policy is the main tool for fighting inflation…” Such a bald bid for tenure!
That’s interesting, because Yours Truly is a Michigan Economics alum.
When I was a student, the department was very much in the Keynesian camp. Yes, there were a couple of Marxists and another prof who fled Communism in Czechoslovakia, and believe me, the refugee and the Marxists avoided each other, but they were the exceptions.
BTW, after the Soviet Union and the Eastern Bloc collapsed, the refugee returned to his homeland and died in Prague.
Yeah, that’s weak. The era of monetary policy dominance has been a disaster.
An effective media presentation, social or otherwise, with graphics displaying tax rates and trends for corporations and carried interest perps would be good.
Compare and contrast them to citizen rates across the spectrum, and toss in citizen and politician income trends for another talking point.
Why don’t media companies like TV networks and newspapers put such information front and center?
Oh, yeah, right. Don’t bite the hand that feeds them. :(
Look, someone from CBS has to hurl softball questions at Bourla while someone makes sure he only gets the blue M&Ms in the green room.
It’s unfair to expect journalism from networks when it’s so much more profitable to air Cialis ads and have the world’s most famous veterinarian to hock today’s vaccine promises. Anything to boost that stock price.
I believe there was a small business exemption for C corps on the first $5000 of income before DT got rid of it in his tax simplification package. My CA reps didn’t even notice or care. How does a small business save for future investment? Oh right borrow instead!
Does Joblow care? Nope.
Calm down. The 15% minimum is only for corps with over a billion in profits.
https://www.washingtonpost.com/business/a-15percent-minimum-corporate-tax-is-no-economic-villain/2022/08/16/96e15c86-1d57-11ed-9ce6-68253bd31864_story.html
These types of laws do not deserve discussion, only derision and ridicule. See revenue components.
… In fact, the revenue is projected … reducing the deficit by roughly a quarter of a trillion dollars over 10 years. … Congress is also hoping to save $265 billion … Medicare program.
Is that 265B part of that 1/4 T? Even if not, that is 25B per year. Why bother, when the congress can spend in a few weeks 56B on whim.
It’s an expected part of the act; people would miss it if it were taken away. For example, someone was glorifying the legislation to me a few days ago, including the newfound glory of an improved IRS, and I said, “Why bother? Just print the money.” There followed a discussion of why just printing the money would not work well, and I noted that Congress had already “just printed the money” when they gave Zelenskyy and Co. 50 billion dollars or whatever. No one has a problem with “just printing the money” as long as they get a cut. In this case the “cut” isn’t even real. The introduction of Larry Summers is a nice touch of the usual foul-smelling villainy, even if it is only décor. I find the idea of using inflation to combat inflation intriguing, however, It’s like a war to end war.
As usual the projections are made up and no one will come back later to compare the real nos. with these. BTW, I suggest that the IRA select Larry Summers for a thorough tax audit. It may net millions!
Taxing isnt just about revenue. Its about redistributing wealth and fairness. I’d rather congress take 25 billion away from the 0.1 percent each year then print it.. That said, yes, I agree it should be more
For some strange reason, I’m reminded of President Ford’s Whip Inflation Now (WIN) campaign.
IRS and audits reminded me of an interview I read years and years ago with The Reverend Ivan Stang, co-founder of The Church of the Subgenius “Praise Bob.” Full disclosure -I was audited by the IRS back in the mid-seventies. I was working as a waiter, finishing up school. A bit nervous going into that audit because what waitperson discloses their real income? It worked out though, I came out of it qualifying as a Poor Person (™).
Anyway, copied an pasted this from the interview:
https://web.archive.org/web/20081227053054/http://www.grayarea.com/subgenius.htm
GA: What about problems with the IRS?
IS: Of course, any dealings by anyone with the IRS are always nightmarish. They have never paid much attention to The SubGenius Foundation, Inc., per se, because a quick scan of our bank records would tell the whole sad story. I, personally, as an individual, was audited in 1983 and 1984, and it caused me the worst headache I ever had in my life, but because I kept books so badly they decided I owed them taxes on money I never made — but I don’t really think I was being targeted due to my Su bGenius activity. It’s just that I was claiming “office in the home,” and when you try to claim that, their computers send them after you. (In the end, they decided that, although I did all my work at home, I didn’t make enough money to qualify my home as an “office.”) Since then, even though I have the most legitimate claim for “office in the home” in the world, I have never claimed it; they’d just audit me again, and nothing’s worth that headache.
Declaring a home office on an individual tax return is a well known audit red flag. The only way to get away with it is have your employer provide a letter saying that having a home office is a condition of employment.
I am not giving tax advice, but hint hint, everyone expects to see office rent on a corp return.
Just a clarification, Yves.
The Home Office deduction is indeed a red flag for a wage earner. For an independent contractor or a wage earner with a profitable (taxable) business on the side, it is not.
I’ve filed dozens of returns with a Home Office deduction and none have been audited, yet. :-)
The auditors don’t always obey the laws. I was audited during a time when I had rentals, W-2 income, and business income. As you can imagine, the amount of paperwork involved was unbelievable, and I had to provide every scrap of it. The first thing I did was to purchase every book I could on audits, the tax laws for the years in question, and the IRS. I knew very little. I should add that my taxes were prepared at significant expense by a professional accountant.
According to all of the books I purchased, the IRS is supposed to grant time extensions if you are having difficulty providing all of the documents on the stated timeline. As far as I was able to determine, the law required them to extend me, but they refused. This was what led to the most physically taxing time of my life I’ve ever experienced (and I used to be an endurance athlete).
My experience was that I was provided with enormous lists of required documents. The only way that I could possibly provide them without quitting work was to go without sleep night after night. That’s what I did, knowing that if I failed to provide the documents I would be docked for the amounts of expenses they proved. Night after night I copied documents, added up adding machine tapes, etc. One night I didn’t go to bed at all, but most nights I managed 1-3 hours of sleep. Eventually, this led to convulsions on one occasion and to dangerously high blood pressure requiring an emergency room visit (I don’t normally have high blood pressure). I began to realize that I would have to risk my life if I wanted to avoid financial ruin, so that’s what I did.
I learned a lot during that hellish time. Here’s what I would recommend to anyone who receives an audit notice:
1) Expect the original notice to actually be extended to three years. You receive an audit notice for just one year, but the rule is to extend it to the last three years. I don’t know anyone who hasn’t had this experience.
2) Purchase the tax law (preparation) books for all three years of your audit. Purchase every other book you can find about the IRS, audits, and tax law. The books are invaluable.
3) Unless you are a tax ninja, you or your preparer probably made a few mistakes. Keep in mind that half of these will likely be in your favor. The IRS will not tell you about them, so read the books to find out all the deductions you or your preparer missed. You can now claim them. Of course, the IRS will try to find mistakes in their favor, but you should also locate all of the mistakes in your favor that you can. An audit is not a one-way street.
4) Provide every scrap of paper and do everything the auditor tells you to do. Be polite and respectful, no matter how you are treated. The initial auditor will probably have some ridiculous denials of certain high-stakes items that you’re sure (from your readings and preparer if you have one) are legitimate. This seems to be the norm. Don’t get upset. Try to get it reversed, but realize that you may have to go to the next level (appeals) to get it reversed. You can have an appeal that’s a pretty easy process. Most of the unreasonable denials will be changed back into your favor at this stage.
5) If you still feel you are treated unreasonably, you can go to tax court. However, you should know in advance that the burden of proof is reversed in tax court. In other words, you are assumed to owe the money and the burden of proof is on you to show that you don’t. No other court works this way. I didn’t go to tax court, so I can’t say much about it.
6) If your audit is like mine, it will be the most physically taxing experience of your life. Just keep copying the documents, running the adding machine tapes, and reading the books. Don’t give up, no matter how bad it gets. Insist on taking new deductions that are in your favor. Eventually, the awful process will end and you will come out okay.
Boo Boo Bear – Wow!
That is one of the worst experiences with the IRS I have heard of. I hope you have recovered your equanimity and health.
You give some good advice about researching your situation. I might also suggest that someone in your position, having used a professional preparer, consult with another professional. The folks you used don’t sound particularly competent.
While the IRS can go to three years (it’s not a rule), that has not been my audit experience as a tax accountant having handled a couple of dozen audits. That they did so with you is more evidence that your preparer wasn’t competent. I wonder how many of their clients have been audited.
One of your most important points is that an audit is not a one-way street. It can also be an opportunity to claim further deductions. Again, if your preparer missed some, that’s a further mark against them.
May you never be audited again.
I’m not qualified to say what I am going to say – but the name “Inflation Reduction Act” is an exercise in defining inflation. Inflation is totally relative. To what? To a thriving economy, citizenry and environment. With all things in balance there is no “inflation” because all corners of the society are doing well. No imbalances. If we spend multiple trillions of dollars to build a new economy there’s a direct tradeoff – the trillions for a well functioning society. This is not “inflation”. So, yes, call it inflation reduction. Whatever. It really should be called the Domestic Improvement Act. So we spend a lot of money. So what?
Even if everything “balances out” and all the boats seem to float higher, inflation is still miserable, inefficient, and unjust.
Why? Because the way in which everything gets “kept in balance” during inflationary times is this: neverending renegotiations of everything.
Therefore, even when those who sell labour have sufficient negotiating power to keep their wages up to pace with inflation, it’s still bad for workers because they become both collectively and indivually exhausted by the interminable struggle that is required just to stay even.
Both my parents were union organizers and activists in the 1960’s. By the end of the 1970’s, all the activism was burned out of them. They were sick of inflation, despite the fact that they had managed to score some marginal real gains. They were sick of strikes, lockouts, grievances, wildcats and all the fighting, most of which was being forced, through inflation, upon both employees and employers alike. They were sick of it all, not only for their own share of the war, but also because of the frequent disruptions of ordinary life that resulted from wage disputes across all sectors.
As a boy, I witnessed this burnout process firsthand. The sort of people who marched for social democracy were instead flogged by high inflation to run on a treadmill of futility, until they collapsed. On paper, their efforts managed to “balance” the inflation, sure. But by the 1980’s, truehearted pinkos like my parents had become receptive to the political messages of Thatcher, Reagan, or in my Canadian instance, Mulroney.
Therefore I vehemently object to this whole notion and attitude that, “big waves of inflation are OK as long as workers can manage to surf along them.” The fundamental error is to regard workers as being people who have nothing to do than go to market and haggle all day for their living, i.e. looking at workers as if they were nothing better than a bunch of bourgeois!
But workers indeed have more important things to do: their work. Workers are the people whose labour produces everything that is worthwhile in society! For the bourgeoisie, constant attention to market flux is the essence of their life and world. For the proletariat, price flux is an unwelcome distraction from the real work at hand, the real life of us human beings. As proles, we go to market from to time to time as we need, but we don’t spend more time and energy there than we must, nor would we want to. We got more important things to do, such as getting on with the entire real life of the world.
Price stability is in the overall best interest of the workers. Capitalism is hellish enough as it is, without a whole bunch of artificially inflated uncertainty and friction being pumped into it.
If you really want to scare the living crap out of the world’s financial overclass, don’t talk about inflation. Instead, threaten them with hard money and ruthless price discovery. “There, negotiate that, you bunch of bourgeois!”
Though businesses can, of course, owe no tax because of perfectly legitimate uses of the tax code, seeing headlines about successful companies paying little to no tax has been galling to many Americans and can potentially undermine the public’s faith in the tax system.
The word “legitimate” above needs to be changed to manipulated or gamed. As the House Ways and Means Committee and the Senate Finance Committee are elected officials most under sway of special interests in the formulating of the tax code which gives rise to the numerous loopholes, giveaways and tax avoidances that inure the most benefits upon the rich (corp or individual) and bestow the burden of taxation upon the least able to make successful effort for relief.
“the helplessness of the uninformed public to understand the chipping away of the tax system that goes on behind an impenetrable screen of technicalities.” The Rape of the Taxpayer by Philip M. Stern
In fairness, I think the fact that most deductions are manipulated or gamed is the whole point of the 15 percent tax. If the only things being deducted were legitimate — actual investments in factories, employee training, etc. — I dont think there would be outrage or a need for the minimum
There were pins!
Good luck filling all those IRS jobs. I was talking to a friend at a global accounting firm and they are having a heck of time filling roles, and I am quite sure they are paying well.
Oh, they’ll fill them – it’s just a question of who they will fill them with.
Why is there no serious discussion as to why the various components in the Inflation Reduction Act (just an example) must be self-funded, but $50B to Ukraine can be provided no questions asked? How do people like Manchin and others get away with this? Why aren’t they ridiculed in academia and across all media platforms?
I think they are ridiculed on platforms divorced from the MICIMATT. But yes, it is breathtaking to watch the passivity of the mainstream media propaganda machine, always taking Pelosi at her word, i.e., that such expenses are the cost of defending democracy [sic] in far flung interests of the American empire. /Cringe/.
Inflation is one thing, but what about reducing inequality? Does anyone do economic projections of how policy interventions are likely to affect the GINI index? I always wonder about that.
As far as I can tell, there really isn’t any inflation in the hair cutting business where technology seems steeped in 60’s era shavers and the like. The thorny issue of gas @ $6.66 or thereabouts must be included, as the devil is always in the details.
Pre-Covid, a haircut and a shave was $20
When things loosened up in 2021, it was $32
Last week it had gone up to $40.
That’s a 50% inflation rate per year on average for those of you scoring @ home, and it isn’t as if they have supply shortage issues or anything to contend with, the indoor one-armed bandits.
They’re just following the crowd anticipating inflation in a raze to the bottom.
The reason it costs so much is because you get the Raze cut.
Whereas I get the Buzz cut. It’s a 60s throwback, and it only costs ten dollah.
:)
A haircut for me here in Montana costs only $12 unless you are a senior citizen,which I am, in which case it costs $11. It has been this way for a long time.I don’t have much hair so it doesn’t take the barber a lot of time but I still think it is pretty cheap so leave the barber a $3 tip
How does this work for orgs that use subsidiaries to shift profit offshore
If for any reason inflation tapers off over the next year, year and a half, 2 years, whatever, then the ill-named Inflation Reduction Act will be claimed by the Dem PR folks as the cause of that.
why is larry summers still around?
How many decades have to go by, when everything he says is proven wrong ;over and over again… until the stench of him being a council on foreign relations member, harvard alum, clinton-ista, etc….is going to wear off?
and you know his “tax -gap” picture in HIS mind is STAGGERINGLY high…. cause look at all of his friends/class warrior fellows….. all probably aspire to contribute to the estimated 30 plus trillion dollars the elites/world over have stashed in tax avoidance domains.
The only reason the inflation act is named this is due to democratic party leaders being jealous of the also ironically named patriot act being the big marketing coup of the last 2 decades.
It’s a symbolic middle finger to the Dems most loyal enthusiasts. They’re probably still laughing at the name as Nancy and Dan Crenshaw compare portfolio returns.