The Republican-controlled House has made the Internal Revenue Service a political target after Democrats bolstered the agency with new funding last year.
Within the first week of the new Congress, a dozen GOP lawmakers introduced a bill that would abolish the IRS altogether and replace the entire federal tax code with a national sales tax.
Separately, the House voted to rescind nearly $80 billion in funding for the agency that Democrats approved last year – with many top Republicans repeating the misleading claim that the money will be used to hire 87,000 auditors.
“Instead of adding 87,000 new agents to weaponize the IRS against small business owners and middle America, this bill will eliminate the need for the department entirely by simplifying the tax code with provisions that work for the American people and encourage growth and innovation,” said Rep. Earl “Buddy” Carter, a Republican from Georgia who introduced the Fair Tax Act earlier this month.
It’s highly unlikely that either bill will become law, given that Democrats still control the Senate. But the measures highlight how America’s two major political parties have very different strategies when it comes to addressing the embattled tax collection agency – which has seen its budget shrink by more than 15% over the past decade and has struggled to not only process returns on time but also answer taxpayers’ questions. Just 13% of phone calls were answered last year.
Democrats have taken a different approach, making funding the IRS a priority. The Inflation Reduction Act, which passed along party lines last year, approved $80 billion for the IRS over 10 years. By using the money to crack down on tax cheats, it’s estimated that the agency could boost federal revenue by more than $124 billion over that time period.
How would the Fair Tax Act work?
The Republicans’ Fair Tax Act is not a new idea. A version was first introduced in Congress in 1999. It’s never had enough support to become law, but it puts forth an appealing message to those Americans who love to hate the federal tax agency.
It would get rid of the complicated federal tax system, doing away with the annual task of filing tax returns. Instead, the bill would replace federal taxes on individual and corporate income with a national 23% sales tax in 2025, allowing for adjustments to the rate in later years. Americans would pay Uncle Sam whenever they bought a new good or service for personal consumption.
The bill calls for abolishing the IRS and directing states to collect the new federal tax.
While every consumer would pay the same tax at the cash register, the bill provides for a monthly tax rebate payment, based on the poverty rate and family size. It’s meant to help offset the tax levy on low-income Americans who tend to spend a higher share of their paycheck on goods and services.
How simple is a national sales tax?
A national sales tax appears very simple: one rate all Americans pay on new goods and services they buy.
But some policy experts say the Fair Tax Act is more complicated than it looks.
“Moving away from taxing income and toward taxing consumption is a step in the right direction for a pro-growth and simpler tax code,” said Garrett Watson, a senior policy analyst at the Tax Foundation, an independent tax policy nonprofit.
But there could still be complications. First, the tax rate would likely have to be higher than 23% in order for the federal government to pull in the same amount of tax revenue that it does now. One estimate found that a tax rate of about 30% would more likely be able to generate the same amount of revenue – or 44%, if measured the way state sales taxes are typically presented.
Second, a nationwide sales tax could leave low- and middle-income people worse off. The current tax system is progressive, meaning it takes a larger percentage of income from high-earners than low-income groups. Even with the monthly tax rebate, a national sales tax would still be less progressive.
A 2011 independent analysis of a similar national sales tax found that, on average, most income groups would pay more tax than they did under the federal tax system at the time – except the top 5% of earners who would see a tax cut.
Additionally, it’s hard to imagine that lawmakers would pass a bill that does not exclude some things from the sales tax, like health care costs, for example.
“The basic income tax is simple too,” said Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center.
It’s the deductions, credits and exclusions – like for retirement savings and charitable giving – that make it complicated.
Plus, Americans would likely have to file some paperwork to some tax collection entity in order to receive the rebate, Gleckman said. The administration cost may be less than it is now, but it wouldn’t be zero.
IRS starts 2023 filing season with a backlog
Tax filing season opens Monday and National Taxpayer Advocate Erin Collins expects IRS services for taxpayers to improve this year – in part due to the funding increase provided by Congress.
Since the Inflation Reduction Act was passed in August, the IRS has hired 5,000 new customer service agents. The agency has also worked to improve its technology so that taxpayers can ask questions via an automated service online, said Treasury Deputy Secretary Wally Adeyemo on a call with reporters last week.
The IRS started the year with about 400,000 unprocessed paper individual returns and about 1 million unprocessed business returns. But it’s in much better shape than the prior year, when it had a backlog of 4.7 million unprocessed individual returns and 3.2 million unprocessed business returns, according to the taxpayer advocate’s annual report to Congress.
Taxpayer service, like answering the phones and processing returns in a timely manner, has suffered as the IRS’ budget has shrunk.
The Covid-19 pandemic brought even more challenges for the IRS. It was tasked with administering several rounds of stimulus payments to millions of Americans with a lot of its staff working from home. This caused long delays for many taxpayers who filed a paper return. The IRS is starting to implement a scanning system so that returns filed by paper can quickly be made digital. Previously, paper returns had to be entered manually into the agency’s computer system.