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In Budget Deal, GOP Handcuffs the IRS. Again.

April 12, 2011

Among the $39 billion in spending cuts contained in the budget deal reached last, one stands out as perhaps the most cynical - and counterproductive. Republicans insisted that the Internal Revenue Service receive no additional funding through September, rebuffing President Obama's request for an additional $600 million to crack down on the tax fraud, evasion and cheating now costing the U.S. an estimated $330 billion annually. But if that act of Republican intransigence, one which will raise the deficit by $3.4 billion, sounds familiar, it should. It's just the latest front in the never-ending GOP war on the IRS underway since the 1990's.
The Boehner brigade fired the first salvo in the GOP budget which passed the House in February. Rejecting the President's ask for a 9% boost - and 5,100 more workers - for the IRS this year, Republicans demanded more cuts in 2012 and beyond. The GOP jihad wasn't merely payback for the Obama administration's crackdown on wealthy tax cheats, but a preemptive strike to gut enforcement of the individual health insurance mandate due in 2014 as part of the Affordable Care Act.
But as Jonathan Cohn explained yesterday, in his budget deal with President Obama and Harry Reid, Speaker John Boehner won day for the GOP's "pro-tax evasion, pro-deficits" position. As the Fiscal Times explained last month:

Among budget cuts Republicans are proposing for the current fiscal year is $600 million in IRS spending between now and September. IRS Commissioner Douglas Shulman told a House subcommittee last week that such a budget cut over just six months likely would reduce federal revenues by $4 billion. The IRS "would need to make substantial cuts to its enforcement programs," he said.
In other words, cut spending by $600 million, lose $4 billion in revenue and add $3.4 billion to the deficit. That's absurd arithmetic and unfair to the large majority of taxpayers who pay what they should. Shulman said the IRS collected $2.345 trillion in fiscal 2010, ended last Sept. 30, some 93 percent of federal receipts.

Writing in the Washington Post in March, Ezra Klein summed up the Republicans "penny-wise, pound-foolish spending cuts":

"Converting dollar bills into $10 bills is an excellent way to pay off your credit card. Except, it seems, if you're a House Republican...
As the Associated Press reported, "every dollar the Internal Revenue Service spends for audits, liens and seizing property from tax cheats brings in more than $10, a rate of return so good the Obama administration wants to boost the agency's budget." It's an easy way to reduce the deficit: You don't have to cut heating oil for the poor or Pell grants for students. You just have to make people pay what they owe."

And what they owe is a lot.
As the Los Angeles Times reported in 1998, "Internal Revenue Service Commissioner Charles O. Rossotti disclosed Friday that Americans are failing to pay $195 billion annually in taxes owed to the federal government, the highest estimate ever of the so-called tax gap." But just a decade later, that figure jumped to $345 billion, a staggering increase of 77%. (It should be noted that GDP rose 61% and the federal budget by 76% during that time.) Coming at a time of record deficits, that figure represents almost 10 percent of the entire annual federal budget.
Four years ago, Congressional Democrats sought to plug at least some of the leak. As then-Congressman Rahm Emanuel put it, "The tax gap is the logical place to go." As the New York Times reported at the time:

House and Senate Democrats say the government could collect as much as $100 billion more a year by whittling the tax gap -- the unpaid taxes, mostly on unreported earnings, that the I.R.S. estimated was about $300 billion a year...
Mark W. Everson, the I.R.S. commissioner, has expressed far greater optimism. At a hearing of the Senate Budget Committee a year ago, he told lawmakers that the government could recover "between $50 billion and $100 billion without changing the dynamic between the I.R.S. and the people."

The Bush administration and its GOP allies blocked that effort, despite Emanuel's pleas that "When you have a number as high as $300 billion in unreported and uncollected income taxes, that puts a burden on everybody." Especially, it turns out, because Republicans believe that some people are more equal than others.
That same year, the IRS shed almost half of the 345 lawyers assigned to monitor the gift and estate taxes paid - or not paid - by those with some of the largest fortunes in the United States.
That effort to gut the IRS was simply class warfare by other means. Unable to permanently repeal the estate tax, the Bush administration instead sought to cripple enforcement. As the New York Times documented:

Six I.R.S. estate tax lawyers whose jobs are likely to be eliminated said in interviews that the cuts were just the latest moves behind the scenes at the I.R.S. to shield people with political connections and complex tax-avoidance devices from thorough audits.
Sharyn Phillips, a veteran I.R.S. estate tax lawyer in Manhattan, called the cuts a "back-door way for the Bush administration to achieve what it cannot get from Congress, which is repeal of the estate tax."

According to the Times, deputy IRS commissioner Kevin Brown confirmed the cuts, but claimed that "because far fewer people were obliged to pay estate taxes under President Bush's legislation." Brown also rejected as "preposterous" the notion that IRS looked the other way when it came to rich tax cheaters.
Sadly for Brown, the data suggests otherwise. Six years ago, the I.R.S. reported that 85 percent of large taxable gifts it audited shortchanged the government. And as the Times detailed at the time:

Over the last five years, officials at both the I.R.S. and the Treasury have told Congress that cheating among the highest-income Americans is a major and growing problem.

A major and growing problem, that is, thanks to the anti-IRS jihad led by Phil Gramm and Congressional Republicans in the late 1990's.
As David Cay Johnston explained in his 2003 classic Perfectly Legal, the GOP during the Clinton administration waged an all-out war on the IRS, turning the priorities for auditing Americans upside-down. As Senator William Roth's Finance Committee held hearings in 1997 and 1998, Mississippi's Trent Lott and Alaska's Frank Murkowski decried the IRS' "Gestapo-like tactics." Don Nickles of Oklahoma raged, "The IRS is out of control!" Congress went on to pass and Bill Clinton signed the IRS Reform and Restructuring Act in 1998.
Even as IRS Director Charles Rossotti warned Congress about an epidemic of tax cheating which had then reached $195 billion a year, Senator Gramm in May 1998 denounced the agency. Peddling myths of jack-booted IRS agents tormenting American tapayers, Gramm called on Rossotti to fire his 50 worst employees. Gramm concluded:

"I have no confidence in the Internal Revenue Service of this country. You do not have a good system. This agency has too much unchecked power."

As the New York Times recounted that spring, the plan to gut the IRS advocated by Phil Gramm and his allies was a popular political gambit, but almost certain to create incentives for tax evasion:

Mr. Gramm spoke at length of how he had ''no confidence'' in the I.R.S., remarks that were in sharp contrast to those of every other senator, who emphasized that the majority of I.R.S. workers were honest and most taxpayers law-abiding.
A variety of tax experts have said in recent weeks that attacks on the I.R.S., which polls show are a potent device to win votes and contributions for Republicans, give comfort to tax cheats and discourage honest taxpayers.

Which, of course, is exactly what happened.

Those reforms in essence gave wealthier Americans carte blanche to cheat and fundamentally undermined tax fairness in the United States. Within one year, property seizures for unpaid taxes dropped by 98%. Liens were sliced by three quarters and levies on bank accounts by two-thirds. Johnston describes (p. 134) the overnight shift of tax policing onto poorer Americans:

In 1999, for the first time, the poor were more likely than the rich to have their tax returns audited. The overall rate for people making less than $25,000 a year was 1.36%, compared with 1.15% of returns by those making $100,000 or more...Over the previous 11 years audit rates for the poor had increased by a third, while falling 90 percent for the top tier of Americans.

That sharp drop in IRS enforcement couldn't have come at a worse time for the U.S. Treasury.
As Johnston detailed, complex partnerships, not-so-blind trusts and dubious real estate schemes have helped the super-rich sidesteps billions in taxes, shifting the burden to lower and middle income Americans. And since then, income inequality in the United States has reached record levels. Adding insult to injury, thanks to the Bush tax cuts between 2001 and 2007 the richest 400 taxpayers in America saw their incomes double even as the rates they paid dropped by almost half.
Mercifully, the Obama administration is beginning to level the playing field. Better late than never, the IRS has finally reversed its decade-long bias for the wealthy. The agency is once again offering the carrot and stick of an amnesty program and prosecution for Americans hiding unreported offshore bank accounts. A new whistleblower program is also beginning to pay dividends: last week the IRS paid an accountant $4.5 million for tipping off the agency that his employer was cheating the American people out of $20 million owed in taxes. As the AP reported in December 2009, in its efforts to recover more than $300 billion in revenue lost to cheating, the IRS is now less likely to audit those earning below $200,000 a year:

IRS enforcement numbers, released Tuesday, show that returns under that amount have a 1 percent chance of getting audited.
Returns showing income of $200,000 and above have a nearly 3 percent audit chance. The percentage jumps to more than 6 percent for returns showing earnings of $1 million or more...
The number of audits jumped 11 percent from 2008 to 2009 for returns with earnings of $200,000 or more, but rose 30 percent for returns showing earnings of $1 million or more. For those under $200,000 the number of audits remained steady.

That new scrutiny of wealthy taxpayers goes a long way towards explaining the Republicans' new scrutiny of the IRS.
Of course, this latest installment in the never-ending GOP campaign to field dress the IRS comes as no surprise. Even before the health care reform law was signed last year, Republicans began propagating the myth that the IRS would hire over 16,000 new agents to enforce the Affordable Care Act's insurance mandate. Now, John Boehner's House colleagues want to drain the Internal Revenue Service and the federal government of badly needed funds. When (measured as a percentage of GDP) both the overall federal tax burden and corporate tax payments in particular are down to levels not seen since 1950, bolstering the IRS should be Washington's first step in curbing the deficit.
Alas, as Ezra Klein lamented, "deficit reduction is not the GOP's top priority."


Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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