House GOP IRS Supplemental and the Fair Tax

Finance: House Republican Supplemental IRS Funding Cuts: Analyzing the Impact on Federal Law Enforcement and the Federal Deficit, May 16, 2023

It seems like we were just talking about this as recently as April 19.  In our comments, we will address what the increased IRS funding really pays for and why it is important and how the Majority could adopt the Fair Tax proposal into several consumption taxes (rather than a single tax) and actually defund the IRS.

Anyone who has ever made a mistake on their taxes (like omitting a child’s Social Security number) or has been in arrears and needed a payment plan knows what it can be like to reach an actual IRS agent. While the agency could certainly leverage its resources by contracting out customer service telecommunications, there are some items, like payment negotiations, that must be handled with agency personnel. 

It is reported that during the pandemic and its recovery period, when people had questions on how to start their enhanced Child Tax Credit payments - or had actual difficulty filing for them - that it was impossible to get an agent on the phone. Both the pandemic and underfunding were equally responsible. The additional money for IRS fixed this. 

Given the number of poor people in the states sending Republicans to Congress, it makes no sense to claw this money back. Even donors want to get the IRS on the phone, so playing politics with customer service makes no sense. Lincoln had something to say about fooling some of the people some of the time. Some of these people may even be less informed members of the Senate minority or their staffs.

The repeal of Roe v. Wade makes returning to the Pandemic era child tax credit essential. Increased funding is included in the President’s Budget and will eventually pass (once Special Counsel Smith has examined what was known by the House Freedom Caucus and when they knew it). The question is, how do we want these funds to be distributed. Should the IRS be a direct social services provider? As we have stated before…

… to end the “stink of welfare” that Senator Manchin so objects to, CTC payments should be included with wages for all employees - not just those with three or more children. They should also be distributed through other federal and state assistance programs - some of which can be reduced to do so.

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. 

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 pay out. 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.

As usual, we have attached the latest version of our tax reform plan, with a separate attachment on how implementation of this plan would affect IRS manpower. The answer is that the change would be drastic. It would also allow the Committee to focus more on how social welfare is being delivered in general, as well as eliminating current roadblocks to promptly filing for Social Security Disability Income.

Let me relate the various provisions to the Fair Tax (and how to modify it):

The closest tax to the Fair Tax we propose is the Invoice Value Added Tax. It would fund discretionary government (and, if a constitutional amendment allowed uneven excise taxes), this could be done on a regional basis. Those regions who want to have a lower rate would fund less government. Those who want more projects and military bases would pass a higher tax. 

This tax would also replace the employer contribution to Social Security, but to make revenue accumulation look more like payment distribution, this revenue would be credited equally to all workers who accumulate the minimum number of credits in a quarter. The employee contribution would remain as it is. The check goes to the Department of the Treasury in either instance and the Social Security Administration will record the proceeds in exactly the same way.

A main objection to the Fair Tax is that it can be gamed by claiming everything you buy is wholesale. This is a big hole, a hole that value added taxes fix. There is already a value added tax on the books, although it is intergovernmental and inadequate. Businesses who collect sales taxes can already deduct them from their business income. This puts the national government in the position of subsidizing state and local sales taxes. The Fair Tax could include this provision for a federal sales tax as well.

The inadequarcy comes from the fact that taxes paid are a dedication rather than a credit. This can, indeed this must be fixed - whether the Fair Tax is enacted or not. Any federal tax paid must be fully credited at the federal level, with state taxes paid credited at the state level. These tax payments should still be used to adjust income. For example, state business income would be reduced by federal Fair Tax or VAT while federal income continues to be adjusted in the current manner.

The other issue with the Fair Tax is that payments to families would be shifted from tax credits to payments forom the Treasury (regardless of whether Social Security or the IRS distributes them). Payments above the “prebate” level would be shifted to state social welfare agencies through either new income stabization programs or by putting most American families on the Food Stamp rolls. 

The amount of these subsidies is uneven. Minor children of disabled or retired parents get various benefit levels and the Earned Income Tax Credit and Child Tax Credit phase in and out at various income levels. A universal child credit added to wages or income support programs (including OASDI, Unemployment Insurance and Pell Grants) would unravel this mess and allow all but the richest families to avoid filing taxes at all (unless they were filing separately as a business owner). For workers, these payments would be distributed with wages as an offset to a second consumption tax - what we call a subtraction VAT, which is essentially a net business receipts tax. 

Health care subsidies would also be added to this tax. Firms who provide insurance coverage would be able to credit a portion of their premiums as a credit against this tax. The proceeds would fund any subsidized public option, which would replace Medicaid for the working poor. Medicaid for nursing homes would be funded by the Invoice VAT. 

States would also use a subtraction VAT as a vehicle for additional income subsidies for high cost states (or urban areas), as well as using the tax to fund other social services (again, with offsets if employers provide these services - such as tuition assistance for workers and their families - as well as any other social welfare spending (for example, mental health care and housing)  that should be funded by employers rather than through property or sales taxes.

If the child tax credit is adequate to meet the needs of most families, prebates for Fair Taxes and Carbon taxes would not be necessary. Instead of limiting child tax credit payments to families based on higher (or lower) incomes, a subtraction VAT surtax would be levied on cash payments to workers or investors in excess of the Social Security Employee Payroll tax cap, with graduated rates for higher incomes. The firm would pay these amounts, not the individual employees, with individual taxation paid on cash salary, dividend or interest income above approximately $400,000 per year - again, with graduated rates of between 6.5% to 26% (more or less).

Subtraction VAT would entirely replace Corporate Income Taxation at all levels. The surtax for cash payments to higher income investors or workers would replace most collections of personal income tax and would assure parity between the tax treatments of labor and capital. There would also be no industry based tax subsidies, save for the deduction of all material costs (possibly including equipment, unless the decision is made to maintain depreciation rules).

Capital gains and estate (or death) taxes would be repealed. Stocks could be considered a consumer good, with a Fair Tax payment for each transaction, or could be levied as an asset value added tax. For those who don’t know economics, and for some who do, investment in secondary markets does not add to Gross Domestic Product. It is savings - or rather - it is gambling. In corporate bankruptcy, stock is worthless. 

Like the rest of the tax system, the capital gains and estate taxes are a maze of rates depending on income and time the asset is held. A single rate would be instituted instead for all short and long term investments. Cash payments in inheritance would not be taxed until they are spent or reinvested. This allows for closing all the loopholes in the system, from life insurance to avoid taxation to borrowing from stock to using business losses to reduce taxes on wages and salaries.

Attachment: Tax Reform Videos included

Attachment: Tax Administration Video