Eliminate Some Tax Laws (Not the IRS) to Avoid Government Shutdowns

This month, the federal government was once again threatened with another shutdown. From November 1995 until today, there have been five shutdowns, with Republicans controlling the House and the Senate for four. This time is no different; the Republicans control the House, and we face another shutdown. While two of the past shutdowns were explicitly More

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Photograph Source: Flickr user reivax – CC BY-SA 2.0

This month, the federal government was once again threatened with another shutdown. From November 1995 until today, there have been five shutdowns, with Republicans controlling the House and the Senate for four. This time is no different; the Republicans control the House, and we face another shutdown.

While two of the past shutdowns were explicitly focused on either dismantling Obama Care or halting the construction of a massive wall on the Mexican border, the underlying discussion concerned how we can best spend public funds to avoid a deeper debt burden.

Although the Republican Party mantra is to shrink government spending, NewsMax columnist Paul deLespinasse wrote, “Republican enthusiasm for reducing the deficit disappears when Republicans occupy the White House. They happily voted to increase the debt limit three times during the Trump administration while increasing the national debt by enacting large tax cuts.”

Trump’s administration increased the national debt by almost $7.8 trillion. According to Eugene Steuerle, co-founder of the Urban-Brookings Tax Policy Center, Trump set a new record. He managed to have his annual deficit become the third-biggest increase of any U.S. presidential administration relative to the size of the economy.

Cutting IRS funding increases government debt.

That Republican approach continued in the first week of November when House Speaker Johnson and the House GOP cut $14.3 billion from IRS funding to pay for an aid package to Israel. It passed the House with all but two Republicans supporting it. Five years ago, Republicans demanded $5.7 billion for Trump’s wall along the U.S.-Mexico border. With Trump’s approval, the government shutdown in 2018 for 34 days — the nation’s most extended shutdown — to get those funds. In the end, Trump got about a third of that amount.

House Democrat Brendan Boyle (Penn.) argued that Speaker Johnson prioritized “deficit-busting tax giveaways for the wealth over helping Israel.” Boyle then claimed that the Congressional Budget Office’s analysis, which reports to Congress, not the President, found that the IRS cut would “hamstring the IRS’s ability to take on wealthy tax cheats.” The report provided data showing that the IRS cut would increase the deficit by almost $12.5 billion over the next ten years.

The funds being cut were part of the IRS budget increase provided by the Inflation Reduction Act (PL 117-169), which a bipartisan vote of Congress approved. Republicans claim that the supposed 87,000 influx of new agents over ten years would spur an uptick of audits against working-class taxpayers.

That number of new IRS employees conducting tax audits is suspect, according to Kelley R. Taylor., Kiplinger’s Senior Tax Editor. She wrote that it appeared “to have come from a Treasury Department estimate of the level of hiring needed to maintain IRS efficiency and keep up with retirements and other staff declines.”  The number of new IRS agents to be hired over a decade is unknown.

In response to the Republican’s attacks on its funding, IRS announced that it was shifting its enforcement efforts to high-income earners, partnerships, and big corporations. Consequently, the agency announced that audit rates would not increase for those earning less than $400,000 annually.

The IRS commissioner said they would “hold our wealthiest filers accountable to pay the full amount of what they owe.” He noted that the years of the IRS being underfunded has “led to the lowest audit rate of well-off filers in the agency’s history.”

His statement is backed by the National Taxpayer Advocate’s 2022 annual report to Congress, which detailed how years of cutting the I.R.S.’s budget has crippled its capacity to enforce the tax code. Cracking down on tax cheaters among the wealthiest sends a message that all citizens should follow the tax laws.

However, the tax laws are a major cause of our government debt. 

Congress needs to revoke laws that primarily benefit top-income citizens. ProPublica provides a detailed reviewof how the wealthy avoid taxes on billions in revenue by skirting a century-old law dealing with stock swaps.

Even though “wash sales” have been forbidden since the 2021 legislation passed, the IRS has not kept up with new accountant strategies. Consequently, the one percent of citizens with more than $10 million get to manipulate outdated stock tax laws that do not apply to wages to shield their income from taxation.

Eliminating inefficient and unfair tax laws is not just a left-wing cause. Conservatives argue against tax laws that distort an open market economy.

The Hoover Institute “promotes personal and economic liberty, free enterprise, and limited government.” In their 1999 essay Welfare for the Well-Off: How Business Subsidies Fleece Taxpayers, they argue that laws providing business subsidies cost American taxpayers nearly $100 billion a year.

The report noted that “in 1997, the Fortune 500 corporations recorded best-ever earnings of $325 billion, yet incredibly Uncle Sam doled out nearly $100 billion in taxpayer subsidies.” The Institute blames both Republican and Democratic administrations for subsidy programs that undermine the free enterprise system and corrupt the political system.

The Republican’s 2017 tax cut legislation contributed to our national debt growth.

Trump’s 2017 Tax Cuts and Jobs Act was passed solely by Republicans. The Senate passed the bill by a party-line vote of 51 to 49. The House passed the bill by a vote of 224 to 201. No House Democrats supported the bill, and 12 Republicans voted no. The law is forecast to raise the federal deficit by hundreds of billions—the Congressional Budget Office estimating $1.9 trillion—over the coming decade.

The new tax law dramatically reduced the corporate tax rate from 40% to 21%, roughly equivalent to the rate paid by US companies’ significant competitors, the European-based multinationals. This argument seemed fair. However, a University of Michigan Law School study on the largest 100 companies based in the US and the European Union in the decade ending in 2010 reveals a severe flaw in this logic.

The authors note that even though the U.S. rate was ten percentage points higher than the average corporate rate in the European Union, the effective U.S. corporate tax rate was the same or lower in comparing these two groups during that period.

Two tax laws have significantly increased US corporate profits since 2010. First, the percentage of income paid after tax breaks—among profitable large corporations fell from 16% in 2014 to 9% in 2018 due to paying less taxes. Second, Trump’s tax law did not significantly close major tax breaks. As a result, their effective tax rate is far below what their European competitors are paying in taxes.

Now corporations and their owners and investors see their incomes rise ever higher, as does the nation’s debt due to less tax revenue.

Expect another threatened government shutdown at the end of January. 

Speaker Michael Johnson avoided a government shutdown by adopting a proposal that the Republican right-wing Freedom Caucus offered. A two-step continuing resolution (CR) was passed by Congress that continued funding for the 12 appropriation bills but only for a limited period. The bills were divided into two sets.

Four less controversial appropriations, like covering veterans’ programs, transportation, and agriculture, would come up for a second vote on January 19 to continue their funding. It was a smart move to first vote for the ones that are most likely to get enough Republicans to fund them again. The other eight spending bills containing the most contentious issues of financing the IRS and border security will come for a vote by February 2, when their CR expires.

The Republican hard right has refused to fund the IRS at Biden’s proposed level and is determined to halt the flow of refugees across our southern border. They have not been willing to compromise with the Democrats and prefer a government shutdown if Johnson relies on them to pass a budget.

The nation will again face the possibility of federal services stopping and the financial markets downgrading our credit. This past shadow of a possible shutdown resulted in Moody’s credit rating agency lowering the U.S. government’s debt to “negative” from “stable,” citing political polarization in Congress.

Even if we get through the first quarter of next year without a shutdown, the threat will return as our national debt of $33 trillion grows. It will only cease growing when Congress decides that its candy store shelves of tax subsidies for the wealthiest citizens and businesses are finally barren.

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