The Manchin-Schumer “Inflation Reduction Act,” which could clear the Senate this weekend, is supposed to raise tens of billions of dollars by adding $80 billion to the IRS budget and hiring as many as 80,000 more auditors and agents.
The plan is estimated to double the number of Americans audited each year. To quote the Church Lady from “Saturday Night Live”: “Well, isn’t that special?”
Most of the money raised from these audits won’t come from the superrich or multibillion-dollar corporations — both well-stocked with accountants and tax attorneys to fight IRS allegations.
Small-business owners and upper-middle-income workers will likely be the targets. The woman who runs an accounting firm or a restaurant won’t have the resources to fight the government in tax court.
This proposal comes just a year after the IRS’s latest scandal, with agents illegally leaking millionaires’ and billionaires’ private tax-return data to the media.
Conservatives should be especially worried. Will the Biden administration weaponize these tens of thousands of new agents against them as it’s done at the Justice Department and the FBI?
No one should forget this is precisely what happened in the Obama-era Lois Lerner affair. The agency cherry-picked for extra scrutiny the tax returns of conservative organizations and donors who happened to oppose President Barack Obama’s policies.
We all want Americans to pay the taxes they owe. But this plan is a brutal way to make that happen.
The bill is also counterproductive: It would add new green-energy tax write-offs and other loopholes to an abstruse 30,000-page tax code.
All this enforcement activity won’t raise nearly the money Congress hopes it will. The backbone of our tax system — as almost all IRS commissioners have noted — is voluntary compliance from the 150 million American workers and businesses that file returns each year.
Tax compliance depends on several factors. First, do Americans think the tax code is fair? Second, is the tax code understandable? Complexity adds to tax cheating. And third, are tax rates low enough to reduce the financial incentive to cheat?
If the tax rate is 50%, the incentive to hide income is twice as high as with a 25% rate. Economist Arthur Laffer shows in his new book “Taxes Have Consequences” that in many periods of history, tax collections rose when tax rates were lowered.
Our tax system fails on all three counts. It’s not fair, as every poll agrees. It’s incomprehensible to the average person. And tax rates on some income are often above 40% or even 50%.
Why not do the opposite of what President Joe Biden and congressional Democrats aim to do? Lower rates and eliminate scores of special-interest carve-outs for lobbyists.
The flat-tax plan we have long endorsed (on which one of us ran for president) would solve all these problems: A 17% single rate, and the only deductions would be for yourself, your spouse and your children. A postcard return. Not much to audit. No special-interest giveaways and no favors for the rich to hide their income.
This would shrink the “tax gap” of unpaid taxes because the rich would no longer have access to exotic shelters in the tax code. The flat tax is an honest and effective way to “soak the rich” without torpedoing the economy.
We’d venture to say that this plan would be so simple to understand and so easy to comply with, the IRS would be able to cut the number of agents and audits in half — not double the number.
Just think about it: a government program that would actually reduce waste and inefficiency instead of adding to it. With a tax rate of just 17%, the economy would boom and we’d leave China in a cloud of dust.
Steve Forbes is chairman and editor-in-chief of Forbes and coauthor of the new book “Inflation.” Stephen Moore is a former Trump economic adviser and an economist with FreedomWorks. They are both co-founders of the Committee to Unleash Prosperity.