Is the IRS Coming for Middle-Class Taxpayers?

Is the IRS Coming for Middle-Class Taxpayers?

By Yuval Rosenberg and Michael Rainey
Wednesday, August 10, 2022

Good Wednesday evening! Here's what's happening.

The GOP’s False, Fearmongering Claims About the IRS’s New Funding

Democrats’ big climate, health care and tax plan provides $79.6 billion in additional funding over 10 years for the Internal Revenue Service. That money includes about $45.6 billion for stepped-up tax enforcement — a crackdown that is projected to raise $124 billion in net revenue.

Republicans have honed in on that funding and revenue in scaremongering messaging that warns that an army of IRS agents will be coming for middle-class taxpayers.

  • “Democrats are making the IRS bigger than the Pentagon, the Department of State, the FBI, and the Border Patrol COMBINED! Those IRS agents will come after you, not billionaires and big corporations!” Sen. Ted Cruz (R-TX) tweeted Sunday.
  • “Value shoppers at Walmart and other retailers, already struggling with higher prices and more expensive fuel to drive to the store, will get hit with 710,000 additional audits thanks to the Manchin-Biden Democrat bill,” Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee said in a statement this weekend.
  • “Do you make $75,000 or less? Democrats' new army of 87,000 IRS agents will be coming for you—with 710,000 new audits for Americans who earn less than $75k,” House Minority Leader Kevin McCarthy (R-CA) tweeted Tuesday.
  • “If you think the federal government is out of control now, God help us when you get 87,000 new IRS agents who are looking under every rock and stone to get money out of your pocket,” Sen. Lindsey Graham (R-SC) tweeted Wednesday.

Those warnings ignore assurances to the contrary from the IRS itself. IRS Commissioner Chuck Rettig said in a letter to Congress last week that the agency did not plan to increase audit rates for middle-class and low-income households. “These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans,” Rettig wrote. “As we have been planning, our investment of these enforcement resources is designed around Treasury’s directive that audit rates will not rise relative to recent years for households making under $400,000.”

The facts: Josh Kelety and Ali Swenson of the Associated Press write that Republicans are distorting the effects of the Democratic bill. Yes, it would add to the number of IRS employees — currently about 80,000 — “but it would not create a mob of armed auditors looking to harass middle-class taxpayers.”

The IRS will be releasing its hiring plans in the coming months, Kelety and Swenson report, but the new employees will be brought on over time, with many replacing workers who quit or retire. The agency has lost about 50,000 employees to attrition over the last five years, and it expects those losses to continue.

“There’s a big wave of attrition that’s coming and a lot of these resources are just about filling those positions,” Natasha Sarin, an economist who now serves as a counselor for tax policy and implementation at the Treasury Department, told Time.

Enforcement staff specifically has dropped by 30% since 2010, but the new hires won’t all be auditors.

“In all, the IRS might net roughly 20,000 to 30,000 more employees from the new funding, enough to restore the tax-collecting agency’s staff to where it was roughly a decade ago, Time’s Eric Cortellessa reports.

Most voters aren’t concerned, poll finds: Despite the GOP messaging, a new Politico-Morning Consult survey finds that most voters aren’t worried about being audited. More than three-quarters of voters said they aren’t concerned about being audited, with the results consistent among Democrats, Republicans and independents. More than half of those surveyed, 56%, said that they are “not at all concerned” or “not too concerned” about an increased number of audits. A plurality of voters (48%) said that they believe higher income Americans would be subject to the greatest increase in audits, though 44% pointed to the middle class.

The survey of 2,005 registered voters was conducted August 5-7 and has a margin of error of plus or minus 2 percentage points.


Corporations Pay More, Middle Class Pays Less Under Dem Climate Bill: Analysis

The Inflation Reduction Act, which is expected to pass the House later this week before heading to President Joe Biden’s desk to be signed into law, will increase taxes on U.S. corporations while reducing the tax burden on middle-class households, according to an analysis released Tuesday by Congress’s Joint Committee on Taxation.

All told, corporations will pay nearly $296 billion more in taxes over 10 years due to provisions in Democrats’ bill, which is primarily focused on an array of efforts to mitigate climate change. About 75% of that total, or $223 billion, will come from a new 15% minimum income tax on U.S. companies that earn at least $1 billion annually. Most of the rest will come from a new 1% tax on stock buybacks.

High-income households will also pay a bit more due to indirect effects related to stock ownership in large firms, JCT said. Households earning more than $500,000 per year are projected to see their taxes increase by about 1%, even though the legislation does not contain any direct rate increase on households.

On the other hand, households earning less than $100,000 per year will see a new reduction in their aggregate tax burden through 2025, due in large part to an extension of Obamacare subsidies. The bill also includes tax breaks on the purchase of electric vehicles, but otherwise has no direct effect on tax rates.

Corporate tax revenues reduced: The corporate tax provisions were modified at the last minute in the Senate in order to win the support of Sen. Kyrsten Sinema (D-AZ), reducing the amount of revenue the bill is expected to bring in. Sinema effectively killed a provision that would have tightened the carried-interest tax loophole, which allows private equity investors to pay a lower tax rate on some of their investment income, reducing overall revenue produced by the legislation by $14 billion. Sinema also successfully lobbied to narrow the new 15% minimum corporate income tax to reduce its effect on manufacturers.

To make up for the lost revenues, lawmakers added a provision that will limit the size of losses claimed by the owners of pass-through businesses, a measure that is projected to raise about $52 billion over 10 years.

July Deficit Drops 30% From a Year Ago

The federal budget deficit for July fell to $211 billion, down 30% from the $302 billion shortfall reported in the same month last year, the Treasury Department said Wednesday.

For the first 10 months of the fiscal year, the government recorded a deficit of $726 billion, down 71% from $2.5 trillion last year.

The shrinking shortfall is the result of rising tax revenues and the end of trillions of dollars in pandemic-related spending. Outlays in July totaled $480 billion, down 15% from $564 billion a year ago. Revenue, meanwhile, came in at $269 billion, up 3% from $262 billion. For the first 10 months of the fiscal year, spending has fallen 18% while receipts have risen 24%.

Inflation Cools in July, but Probably Not Enough to Change the Fed’s Course

Consumer prices held steady in July compared to the month before, as the Consumer Price Index rose 0% during the month, the Bureau of Labor Statistics reported Wednesday.

Using July 2021 as a baseline, prices rose by 8.5% — a much faster annual pace than the Federal Reserve’s target of 2%, but a decrease from the 9.1% annual inflation rate recorded in June, and below expectations.

A big drop in fuel prices during July drove the reduction in inflation. Gasoline prices fell 7.7%, enough to offset increases in the cost of food and shelter, which rose by 1.1% and 0.5% on a monthly basis, respectively. Used car prices fell by 0.4%, but new car prices continued to rise, climbing by 0.6% in July.

“The drop in gasoline prices has been very welcome, but that doesn’t solve the inflation problem," Bankrate’s Greg McBride told Yahoo Finance. "Consumers are getting a break at the gas pump, but not at the grocery store."

Still, the report raises the hope that the U.S. economy may have already seen the peak of the inflationary surge, though more data will be needed before any firm conclusions can be made.

Core stays hot: The core CPI rate, which excludes volatile fuel and food prices, rose by 0.3% in July and by 5.9% over the last 12 months, matching the reading in June, suggesting that core inflation has stopped accelerating. Nevertheless, the core rate – which is the preferred measure of inflation for the Federal Reserve – remains quite high, providing little hope for those who want the central bank to back off its aggressive stance on inflation.

“I still think the Federal Reserve is on for 75 basis points,” said Diane Swonk, chief economist at KPMG, referring to the next interest rate announcement from the Fed, coming in September. “They need to see much more improvement than this sustained, especially in the core. We could be looking at slower moves by the end of the year.”

Despite the warnings, the relatively good news on inflation was enough to drive stocks sharply higher as ever-hopeful traders embraced the possibility that the Fed will ease its tightening campaign. Some economists, however, counseled a more cautious outlook.

“This data will not alter the path of monetary policy out of the Federal Reserve, which in our estimation needs to lift the policy rate to at least 4% before it considers pausing to ascertain the adjustment of the economy to the shift in policy to obtain price stability,” Joseph Brusuelas, chief economist at the consulting firm RSM, wrote. “We expect a 75-basis-point hike at the September meeting.”


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