I'll be happy to eat crow on this if I am wrong, but I am highly skeptical of increased enforcement leading to significant gains in revenue. The first thing to look at is the IRS' current audit reports.
Going back to the 2015 tax year where audits are mostly complete, we see the IRS was at somewhere around 23 Billion in recommended additional tax dollars (16 billion for individuals; 7 billion for corporations). Things you should notice looking through the years is that auditing the big boys is not where the money is, even when some 7-8% of big returns are audited. The places with bang for the buck are (1) the people who report no income; (2) people who report 0-25k income; and (3) people who claim refundable earned income tax credits.
Next you can look at the corporate returns. It varies from year-to-year, but the $20 Billion+ is generally the highest in additional dollars owed. But the thing is the that 55-80% of big returns are audited, so there isn't much more juice to squeeze out of those returns. The additional money squeezed out of small businesses which are audited at a lower rate is pretty weak, around 36k a pop per audit with something under 1% of returns examined.
So why is this a problem? The IRS thinks that 80% of the tax gap lives in under reporting of income, with 56% of the under reporting being in individual income tax (13% non business income; 25% business income, 16 percent employment taxes [looking at you Michael Avenatti] 10% credits, and a bunch of miscellaneous stuff). It's also worth noting that as part of measuring the tax gap, the IRS assumes that it is bad at auditing and tosses another 10% on top as a estimate of the undetected lost income which presumably wouldn't be caught if they can't catch it on the returns that they do audit. But long story short, there is nothing in the published numbers that suggests there is an easy enforcement road to collecting additional tax dollars. The easy stuff is already found, and the grind will be combing through more of the no income, low income and EIC returns.
Finally, I would note that promised estimated tax collection through vigorous enforcement has absolutely bombed previously. FATCA turned the world banks into reporters on Americans and gave them a giant burden on tax filing. Even after paring down, FACTA was promised to bring in 8.7 billion over ten years. The actual number? 300 million [edit: a year to start, and then decreasing] .
Jason Furman should have stuck to his weariness, there is no free lunch just hanging out in uncollected tax revenue. I hope I'm wrong, but it just doesn't pass the smell test.
Based on this tweet (assuming that it is correct and that these are additional audits per year) I did the math. I'm making the Larry Summers assumption here that there is no diminishing returns on audits. I will use the 2015 tax year again because this is the year where audits are mostly complete. I will also use "closed" returns as my numerator instead of worrying about the small amount of returns in process. I'm also rounding.
No Income. From 45k (6.9% of total no income returns, nice) returns reviewed a year to 173k (24.9%) reviews a year. Average $40,000 in recommended additional tax dollars per return reviewed. Net 5.1 Billion
1-25k in reported income. From 357k (0.7%) reviews to 670k (1,2%). $4,900 a return. Net 1.5 billion.
25k - 50k. From 141k (0.4%) to 289k (0.8%). $5,400 a return. Net .8 Billion
50k-75. From 108k (0.5%) to 231k (1.1%). $4,400 a return. Net .55 Billion
75k-100k. From 64k (0.5%) to 184k (1.4%). $5,200 a return. Net .66 Billion
100k-200k. From 92k (0.5%) to 253k (1.3%). $6,900 a return (nice). Net 1.1 Billion
200k-500k. From 31k (0.6%) to 191k (3.3%). $14,000 a return. Net 2.2 Billion
500k-1mil. From 10k (1.1%) to 52k (5.2%). $25,000 a return. Net 1 Billion.
1mil-5mil. From 9.7k (2.4%) to 52k (11.4%). $53,000 per return. Net 2.2 Billion
5mil to 10 mil. From 1.2k (4.5%) to 6.4k (19.0%). $99,000 per return. Net .5 Billion
10mil+. From 1.4k (8.5%) to 5.7k (27%). $199,000 per return. Net .85 Billion
Total Net 16.7 Billion.
It's unclear to me what the time period is over which the IRS is receiving an extra 80 Billion. But with these assumptions, which are probably generous, it would have to be over a little under 5 years to pay for itself. If it is over 10 years, the total net tax revenues after accounting for the 80 billion would be 87 Billion. There would be a ~4 year lag period because that's how long it takes for the IRS to get mostly done with the audits. If these assumptions held (absolutely zero diminishing returns), the IRS estimate on net receipts is about 37 Billion too high. And Larry Summers is in la-la land thinking that this is 124 Billion is a gross underestimate.
What about the other parts of the bill related to US energy? Nuclear mini-reactors- will they be labeled green? new pipelines in WV...increased drilling leases...there is a whole lot going on.
I feel like the fundamental problem with revenue-through-enforcement is that the US already has fairly high voluntary compliance rates. It's unclear how much higher it can really get unless we've been measuring the tax gap completely wrong for decades.
Isn't the bigger question whether it can actually pass? Manchin has made it clear that his vote is contingent upon passing a separate piece of legislation easing the regulatory burden on energy companies seeking to expand their operations. That would seem to be something that cannot be done through the reconciliation process, and it seems to me the Republicans would refuse to pass it (even though they'd be in favor of it in a vacuum) to prevent Manchin from voting for the IRA. Am I wrong? If not, why isn't anyone talking about this? EDIT: I see there is a WSJ editorial today addressing this exact point, although they're approaching it from the point of view of being doubtful all Democrats in the House will support it. Either way, it's hard to see it happening.
I think the precondition to Manchin's vote on the IRA is not "passing permitting reform" it is "securing commitments from Pelosi and Schumer to work towards passage of permitting reform". I think the IRA vote will come first. Manchin is taking a leap of faith.
Anyway, after that point Republicans have less reason to oppose. Although with the hissy fit they threw on the burn pits legislation, who knows.
All I can tell you is what I read this morning in the WSJ, which says: "Senate Majority Leader Chuck Schumer (D., N.Y.) and Sen. Joe Manchin (D., W.Va.) say the permitting measure will be included in a companion bill to their surprise $369 billion climate-and-tax deal unveiled last week."
His Fox News interview this weekend very much implied that it was a handshake deal and based on trust, which signaled to me that there was not a formal deliverable from Schumer *before* Manchin's vote, but we'll see how things shake out.
Found this quote: "Schumer said that the agreement on $369 billion in climate spending included commitments from House Speaker Nancy Pelosi (D-Calif.) and the White House to attempt to include the provision in a separate stopgap funding bill Congress will need to pass in September to sustain government operations." https://www.eenews.net/articles/democrats-open-to-manchins-push-for-permitting-reform/ [not sure what that website is, admittedly]
Interesting, but perhaps what they mean is they want to include the main climate/tax bill in with the stopgap spending bill. I don't think they could mean Manchin's separate permitting bill, because the parliamentarian would kick that piece out as not spending-related and therefore not to be included in a reconciliation bill.
correct, the permitting bill can't be in reconciliation, that's why I believe it refers to an entirely separate piece of legislation. I'm not saying I know all of the details, but the commitment in Schumer's joint statement was to "pass comprehensive permitting reform legislation before the end of this fiscal year," and Manchin's statement said that Pelosi/Schumer/Biden had "committed to advancing" permitting legislation.
This is all to say, I believe, and am hopeful, that your original statement that "Manchin has made it clear that his vote is contingent upon passing a separate piece of legislation" is incorrect. He secured assurances, and I do not think Pelosi/Schumer would back out of those assurances, but it does not appear to be a precondition that permitting be sequenced first, eliminating the incentive you theorized Republicans would have to block permitting.
Well, just to be clear, not my statement, just quoting what was in the WSJ. :-) If you're correct, then I'd love to know what Manchin is thinking. If he only asked for and received a promise to "move the permitting bill forward," does he think that bill could clear the fillibuster? Or did he just make the deal knowing that if it didn't, he could throw up his hands and say, "I tried," and blame the Republicans for blocking something they'd otherwise support. He doesn't strike me as someone who would agree to the overall package if he had the latter view (assuming in fact he doesn't have a companion bill commitment). Hmm.
If I was the Republicans I would tie any further IRS funding to figuring out who leaked the CEO tax details last year (2 years ago?). All govt bureaucracies are slowly becoming progressive activist organizations. Without any oversight, it's essentially writing a giant check to your political enemies. I expect a lot of "leaks" that are highly favorable to Democratic policy concerns in the future.
The thrust of the ideas are necessary, but I'm skeptical of the legislation.
I'm skeptical of the continuing EV credit helping much. Something like a quarter of carbon emissions from the US are due to transportation. Focusing on the 50% arising from electricity and industrial generation seems like the closest alligator to the canoe. We know how to make static green energy sources and those technologies have rapidly increased in efficiency. Schumer has admitted that the EV credits don't amount to much in emissions reduction. I do like the incentives for building solar, wind and nuclear which appears to be part of the bill, but I would like to see more of how it plays out before passing judgment.
I like the carbon capture funding. Getting carbon out of the air is going to be an important part of climate fighting as we lower emissions because of how long it takes CO2 to dissipate from the atmosphere. It will be past the year 3000 before CO2 levels get back to normal absent technological intervention. This technology is inefficient right now and it could use an innovation funding boost.
If this actually does result in deficit reduction, deficit reduction is indeed essential as our debt to GDP ratio is out of control. Just like businesses, countries go bankrupt slowly and then quickly. The United States falling into a sovereign debt crisis would trigger a world wide depression and likely lead to massive stability concerns. Josh is 100% wrong that austerity was not necessary in 2013. But he is 100% right that it is needed now and it is needed even more than it was in 2013. The problem is that United States federal government receipts to GDP stays within a relatively narrow band of 15-20%. Which makes GDP growth the easier way to drive increases in receipts. Finding a tax policy that maximizes current receipts without a substantial impact on future receipts (like wealth tax for example) is pretty important. I don't see great evidence that we're on wrong side of the Laffer curve, which means increasing taxes is the correct thing to do (as is lowering spending, but these are Democrats so they aren't going to espouse that policy anytime soon, and Republicans don't know how to lower spending either).
I'll be happy to eat crow on this if I am wrong, but I am highly skeptical of increased enforcement leading to significant gains in revenue. The first thing to look at is the IRS' current audit reports.
https://www.irs.gov/pub/irs-soi/21dbs03t17ex.xlsx
Going back to the 2015 tax year where audits are mostly complete, we see the IRS was at somewhere around 23 Billion in recommended additional tax dollars (16 billion for individuals; 7 billion for corporations). Things you should notice looking through the years is that auditing the big boys is not where the money is, even when some 7-8% of big returns are audited. The places with bang for the buck are (1) the people who report no income; (2) people who report 0-25k income; and (3) people who claim refundable earned income tax credits.
Next you can look at the corporate returns. It varies from year-to-year, but the $20 Billion+ is generally the highest in additional dollars owed. But the thing is the that 55-80% of big returns are audited, so there isn't much more juice to squeeze out of those returns. The additional money squeezed out of small businesses which are audited at a lower rate is pretty weak, around 36k a pop per audit with something under 1% of returns examined.
So why is this a problem? The IRS thinks that 80% of the tax gap lives in under reporting of income, with 56% of the under reporting being in individual income tax (13% non business income; 25% business income, 16 percent employment taxes [looking at you Michael Avenatti] 10% credits, and a bunch of miscellaneous stuff). It's also worth noting that as part of measuring the tax gap, the IRS assumes that it is bad at auditing and tosses another 10% on top as a estimate of the undetected lost income which presumably wouldn't be caught if they can't catch it on the returns that they do audit. But long story short, there is nothing in the published numbers that suggests there is an easy enforcement road to collecting additional tax dollars. The easy stuff is already found, and the grind will be combing through more of the no income, low income and EIC returns.
https://www.irs.gov/pub/irs-pdf/p1415.pdf
Finally, I would note that promised estimated tax collection through vigorous enforcement has absolutely bombed previously. FATCA turned the world banks into reporters on Americans and gave them a giant burden on tax filing. Even after paring down, FACTA was promised to bring in 8.7 billion over ten years. The actual number? 300 million [edit: a year to start, and then decreasing] .
https://reason.com/2021/06/09/biden-wont-close-the-tax-gap-but-he-will-snoop-on-your-bank-records/
Jason Furman should have stuck to his weariness, there is no free lunch just hanging out in uncollected tax revenue. I hope I'm wrong, but it just doesn't pass the smell test.
Based on this tweet (assuming that it is correct and that these are additional audits per year) I did the math. I'm making the Larry Summers assumption here that there is no diminishing returns on audits. I will use the 2015 tax year again because this is the year where audits are mostly complete. I will also use "closed" returns as my numerator instead of worrying about the small amount of returns in process. I'm also rounding.
https://twitter.com/JacquiHeinrich/status/1555700945928929280?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Etweet
No Income. From 45k (6.9% of total no income returns, nice) returns reviewed a year to 173k (24.9%) reviews a year. Average $40,000 in recommended additional tax dollars per return reviewed. Net 5.1 Billion
1-25k in reported income. From 357k (0.7%) reviews to 670k (1,2%). $4,900 a return. Net 1.5 billion.
25k - 50k. From 141k (0.4%) to 289k (0.8%). $5,400 a return. Net .8 Billion
50k-75. From 108k (0.5%) to 231k (1.1%). $4,400 a return. Net .55 Billion
75k-100k. From 64k (0.5%) to 184k (1.4%). $5,200 a return. Net .66 Billion
100k-200k. From 92k (0.5%) to 253k (1.3%). $6,900 a return (nice). Net 1.1 Billion
200k-500k. From 31k (0.6%) to 191k (3.3%). $14,000 a return. Net 2.2 Billion
500k-1mil. From 10k (1.1%) to 52k (5.2%). $25,000 a return. Net 1 Billion.
1mil-5mil. From 9.7k (2.4%) to 52k (11.4%). $53,000 per return. Net 2.2 Billion
5mil to 10 mil. From 1.2k (4.5%) to 6.4k (19.0%). $99,000 per return. Net .5 Billion
10mil+. From 1.4k (8.5%) to 5.7k (27%). $199,000 per return. Net .85 Billion
Total Net 16.7 Billion.
It's unclear to me what the time period is over which the IRS is receiving an extra 80 Billion. But with these assumptions, which are probably generous, it would have to be over a little under 5 years to pay for itself. If it is over 10 years, the total net tax revenues after accounting for the 80 billion would be 87 Billion. There would be a ~4 year lag period because that's how long it takes for the IRS to get mostly done with the audits. If these assumptions held (absolutely zero diminishing returns), the IRS estimate on net receipts is about 37 Billion too high. And Larry Summers is in la-la land thinking that this is 124 Billion is a gross underestimate.
Fin.
What about the other parts of the bill related to US energy? Nuclear mini-reactors- will they be labeled green? new pipelines in WV...increased drilling leases...there is a whole lot going on.
I feel like the fundamental problem with revenue-through-enforcement is that the US already has fairly high voluntary compliance rates. It's unclear how much higher it can really get unless we've been measuring the tax gap completely wrong for decades.
Isn't the bigger question whether it can actually pass? Manchin has made it clear that his vote is contingent upon passing a separate piece of legislation easing the regulatory burden on energy companies seeking to expand their operations. That would seem to be something that cannot be done through the reconciliation process, and it seems to me the Republicans would refuse to pass it (even though they'd be in favor of it in a vacuum) to prevent Manchin from voting for the IRA. Am I wrong? If not, why isn't anyone talking about this? EDIT: I see there is a WSJ editorial today addressing this exact point, although they're approaching it from the point of view of being doubtful all Democrats in the House will support it. Either way, it's hard to see it happening.
I think the precondition to Manchin's vote on the IRA is not "passing permitting reform" it is "securing commitments from Pelosi and Schumer to work towards passage of permitting reform". I think the IRA vote will come first. Manchin is taking a leap of faith.
Anyway, after that point Republicans have less reason to oppose. Although with the hissy fit they threw on the burn pits legislation, who knows.
All I can tell you is what I read this morning in the WSJ, which says: "Senate Majority Leader Chuck Schumer (D., N.Y.) and Sen. Joe Manchin (D., W.Va.) say the permitting measure will be included in a companion bill to their surprise $369 billion climate-and-tax deal unveiled last week."
His Fox News interview this weekend very much implied that it was a handshake deal and based on trust, which signaled to me that there was not a formal deliverable from Schumer *before* Manchin's vote, but we'll see how things shake out.
Found this quote: "Schumer said that the agreement on $369 billion in climate spending included commitments from House Speaker Nancy Pelosi (D-Calif.) and the White House to attempt to include the provision in a separate stopgap funding bill Congress will need to pass in September to sustain government operations." https://www.eenews.net/articles/democrats-open-to-manchins-push-for-permitting-reform/ [not sure what that website is, admittedly]
Interesting, but perhaps what they mean is they want to include the main climate/tax bill in with the stopgap spending bill. I don't think they could mean Manchin's separate permitting bill, because the parliamentarian would kick that piece out as not spending-related and therefore not to be included in a reconciliation bill.
correct, the permitting bill can't be in reconciliation, that's why I believe it refers to an entirely separate piece of legislation. I'm not saying I know all of the details, but the commitment in Schumer's joint statement was to "pass comprehensive permitting reform legislation before the end of this fiscal year," and Manchin's statement said that Pelosi/Schumer/Biden had "committed to advancing" permitting legislation.
This is all to say, I believe, and am hopeful, that your original statement that "Manchin has made it clear that his vote is contingent upon passing a separate piece of legislation" is incorrect. He secured assurances, and I do not think Pelosi/Schumer would back out of those assurances, but it does not appear to be a precondition that permitting be sequenced first, eliminating the incentive you theorized Republicans would have to block permitting.
Just my 2 cents.
Well, just to be clear, not my statement, just quoting what was in the WSJ. :-) If you're correct, then I'd love to know what Manchin is thinking. If he only asked for and received a promise to "move the permitting bill forward," does he think that bill could clear the fillibuster? Or did he just make the deal knowing that if it didn't, he could throw up his hands and say, "I tried," and blame the Republicans for blocking something they'd otherwise support. He doesn't strike me as someone who would agree to the overall package if he had the latter view (assuming in fact he doesn't have a companion bill commitment). Hmm.
If I was the Republicans I would tie any further IRS funding to figuring out who leaked the CEO tax details last year (2 years ago?). All govt bureaucracies are slowly becoming progressive activist organizations. Without any oversight, it's essentially writing a giant check to your political enemies. I expect a lot of "leaks" that are highly favorable to Democratic policy concerns in the future.
Tough to find as through and smart commentary as this anywhere else. Thanks Josh.
None of this seems necessary
The thrust of the ideas are necessary, but I'm skeptical of the legislation.
I'm skeptical of the continuing EV credit helping much. Something like a quarter of carbon emissions from the US are due to transportation. Focusing on the 50% arising from electricity and industrial generation seems like the closest alligator to the canoe. We know how to make static green energy sources and those technologies have rapidly increased in efficiency. Schumer has admitted that the EV credits don't amount to much in emissions reduction. I do like the incentives for building solar, wind and nuclear which appears to be part of the bill, but I would like to see more of how it plays out before passing judgment.
I like the carbon capture funding. Getting carbon out of the air is going to be an important part of climate fighting as we lower emissions because of how long it takes CO2 to dissipate from the atmosphere. It will be past the year 3000 before CO2 levels get back to normal absent technological intervention. This technology is inefficient right now and it could use an innovation funding boost.
If this actually does result in deficit reduction, deficit reduction is indeed essential as our debt to GDP ratio is out of control. Just like businesses, countries go bankrupt slowly and then quickly. The United States falling into a sovereign debt crisis would trigger a world wide depression and likely lead to massive stability concerns. Josh is 100% wrong that austerity was not necessary in 2013. But he is 100% right that it is needed now and it is needed even more than it was in 2013. The problem is that United States federal government receipts to GDP stays within a relatively narrow band of 15-20%. Which makes GDP growth the easier way to drive increases in receipts. Finding a tax policy that maximizes current receipts without a substantial impact on future receipts (like wealth tax for example) is pretty important. I don't see great evidence that we're on wrong side of the Laffer curve, which means increasing taxes is the correct thing to do (as is lowering spending, but these are Democrats so they aren't going to espouse that policy anytime soon, and Republicans don't know how to lower spending either).