Finance: IRS Budget 2022

Finance, IRS Budget 2022, June 8, 2021

As the pandemic recedes (there are only so many possible vectors for the virus remaining), the IRS can begin to bring people back to work. Contractors, including former revenue agents, can be helpful in clearing the backlog. Such relationships should continue so that the portion of the tax gap due to non-compliance can be closed. As more well off individuals face enforcement, others will do a better job of paying what they owe under the law. 

IRS funding is not adequate at present to meet the immediate challenge. The recent change in government should bring about more of a willingness to spend the necessary funds. We welcome the President’s proposals in this area, at least for now, although our proposed Asset Value Added Tax will end the need to increase audit resources. As with clearing the backlog, hiring back or contracting with former revenue agents will provide a quick bang for the buck in doing auditing, and it decreases the pool of former agents who help their clients avoid taxation.

The second issue is distributing the increased child tax credit to eligible families. For middle income taxpayers whose increased credits are less than their annual tax obligation, a simple change in withholding tables is adequate. Procedures are already in place to deliver refundable credits to larger families. For the coming year, they merely need to be expanded to all families with children. This fact was likely already included in Mr. Rettig’s testimony. If not, I am sure he can easily confirm that this is the case. 

Employers can work with their bankers to increase funds for payroll throughout the year while requiring less money for their quarterly tax payments (or estimated taxes) to the IRS. The main issue is working out those situations where employers owe less than they payout. This is especially true for labor intensive industries and even more so for low wage employers. A higher minimum wage would make negative quarterly tax bills less likely. Indeed, no one should have to subsist mainly on their child tax payments.

A further challenge is fraud. I am not speaking of fictional dependents, but of hiring more employees than workload demands in order to reduce tax payments. Once the American Relief Act expires, any permanent increase to and refundability of the child tax credit (and ideally an even more generous credit) will require permanent tax reform. At that point, the issue of possible fraud must be addressed. Even without comprehensive reform, corrective legislative language will be necessary.

Senior committee members and staff are likely familiar with the Center’s proposals for tax reform which, as usual, are included as an attachment. A summary of individual policy changes has been added. As the reader has likely surmised, tax reform is the third issue.

Allow me to highlight six points. 

First, the difference between changing quarterly withholding and enacting a subtraction VAT  is six of one and a half dozen of the other. 

The reason for this is that the proposed subtraction VAT is based on the notion that employers would be responsible for paying and reconciling the taxes now filed by employees. This would add little additional burden to employers (especially the self-employed) but end the burden of filing for all but the highest salaried employees.

The second is that this debate has gone on so long that the numbers have changed. What used to be proposed at $75,000 per year should now be delivered at $85,000. Proposals should always be indexed. 

Third, for the sake of parity, the minimum wage should be set to $10 per hour immediately, with a phase in to $12 per hour to restore wages to the level of productivity found in 1965. $15 should be treated as either a bargaining chip or as the inflationary position to reach the same buying power $12 wage would provide now.

Fourth, enacting an asset VAT allows for higher tiered subtraction VAT (as proposed by Lawrence B. Lindsey) to replace some or all taxation of  higher incomes at progressive, rather than proportional rates. The only advantages of keeping filing in place for high income individuals (rather than households) are that keeping the highest salary rate and the Asset VAT rate the same will reduce the incentive to game income streams to avoid taxes and to allow higher income individuals to purchase tax prepayment bonds, thus reducing the national debt sooner than later.

Fifth, the biggest untold subsidy in the tax code is the exception mutual funds enjoy from pay capital gains and dividend taxes. This needs to end. Shifting from personal income tax collection of capital gains and revenues (and payouts from mutual funds), ends the logic for this exception. It is time to TAX TRANSACTIONS, NOT PEOPLE!

Sixth is that in reality, explicit and implicit value added taxes are already in force. 

Individuals and firms that collect retail sales taxes receive a rebate for taxes paid in their federal income taxes. 

Tax withheld by employers for the income and payroll taxes of their labor force is an implicit VAT. A goods and services tax simply makes these taxes visible.

Should the tax reform proposed here pass, there is no need for an IRS to exist, save to do data matching integrity. States and the Customs Service would collect credit invoice taxes, states would collect subtraction VAT, the SEC would collect the asset VAT and the Bureau of the Public Debt would collect income taxes or sell tax-prepayment bonds. See the second attachment for details on this.

Attachment: Tax Reform

Attachment: Tax Administration