As published on ft.com, Sunday 21 August, 2022.
As Congress prepared to vote on President Joe Biden’s $700bn climate, tax and healthcare bill this month, the head of the US tax collection agency sent a letter to lawmakers pleading for its passage.
Charles Rettig, commissioner of the Internal Revenue Service, knew that an $80bn funding boost for the agency included in the bill was becoming one of the package’s most controversial measures among Republicans and rallied to its defence.
“We are the greatest country in the world, yet the agency that touches more Americans than any other continually struggles to receive sufficient resources to fulfil its important mission,” said Rettig, who was nominated to the position by former president Donald Trump.
“The IRS has for too long been unable to pursue meaningful, impactful examinations of large corporate and high-net-worth taxpayers to ensure they are paying their fair share,” he added.
The bill, including the IRS provisions, was approved by slim Democratic majorities on Capitol Hill and signed into law by Biden. Since then, Republican outrage has risen, delivered in a steady stream of conspiracy theory-fuelled accusations that the Biden administration was enlisting tax collectors to persecute political enemies along with ordinary households and businesses.
Those attacks multiplied after Trump’s Mar-a-Lago estate was raided by FBI agents last week, as critics sought to link the two as similar instances of the same oppressive federal government. “Abolish the IRS”, Ted Cruz, the Republican senator from Texas, wrote on Twitter on Sunday.
“Are they going to have a strike force that goes in with AK-15s already loaded ready to shoot some small business person in Iowa?” asked Chuck Grassley, the veteran Republican senator of Iowa and longtime member of the tax-writing Senate finance committee who is running for re-election this year, while speaking to Fox News this month.
“I think they’re going after middle class and small business people because basically, they think anybody that has ‘pass-through income’ is a crook and aren’t paying their fair share,” he added, referring to business profits that are filed on individual tax returns.
The IRS has faced plenty of political firestorms under previous presidents. Richard Nixon was criticised in the 1970s for wanting the agency to increase its scrutiny of his political enemies. More recently, under Barack Obama, it faced a probe for disproportionately challenging the tax-exempt status of conservative organisations.
Last year, the agency was criticised by the right after the tax returns of some of the wealthiest Americans were leaked to ProPublica, the investigative news organisation. Rettig was also attacked from the left for not releasing Trump’s tax returns despite pressure from Democratic lawmakers.
“The IRS has never been the prom king of government agencies. It’s always ranked low in terms of popularity,” said Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center. “People and the politicians who represent them don’t like the enforcement arm of the IRS.”
“These controversies are entirely manufactured, but they rest on the age-old anti-tax hysteria that ‘the taxman is coming to get you,’” said Emily DiVito, senior programme manager at the left-leaning Roosevelt Institute think-tank.
Many tax experts have said a funding boost for the IRS was overdue. According to the Center on Budget and Policy Priorities think-tank, the IRS’s budget is 20 per cent lower than its 2010 level when adjusted for inflation, while its full-time employees have declined by a fifth. The audit rate has dropped 54 per cent for large companies and 71 per cent for millionaires. The “tax gap”, which measures the difference between taxes owed and taxes collected, is around $600bn annually, a Treasury official said.
Biden administration officials said the funding increase spread over a decade would be used for technological upgrades, better customer service and additional staffing, including replacing a series of expected retirements and increasing audits of the richest taxpayers. Over time, this would raise revenue to pay for the spending in the bill and reduce the budget deficit, the administration said.
Officials have also pushed for the bill as crucial to improving fairness in the US tax administration after years of concerns, particularly on the left, that the richest businesses and individuals with offshore accounts and complex partnerships were benefiting from lax tax treatment and had lower compliance rates than middle-class families.
“There shouldn’t be a two-tiered tax system,” said Natasha Sarin, counsellor for tax policy and implementation at the US Treasury.
But the Republican attacks have put the Biden administration on the defensive, forcing them to make it clear that the funding would not and should not be used for more audits on Americans earning less than $400,000 per year. Biden campaigned in 2020 on a pledge not to raise taxes on families earning less than $400,000.
“Contrary to the misinformation from opponents of this legislation, small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited,” US Treasury secretary Janet Yellen said in a letter to Rettig this month.
But Republicans, who have otherwise struggled to find ways to attack Biden’s latest economic package in a way that will resonate with voters, have been undeterred in flagging these provisions as a prime political target, and the issue will probably remain a focus of midterm election campaigns.
“When Joe Biden and his campaign promised the American people that, ‘Oh, taxes were not going to go up for people earning less than $400,000,’ that was a lie,” Andy Barr, the Republican lawmaker from Kentucky, told NBC. “This bill is going to come at the expense of the American people.”