Thursday, August 11, 2022

The Internal Revenue Service (IRS) is Not the Problem

The Internal Revenue Service (IRS) is not the problem. 

Over the last two decades (at least) whenever Republicans have had the opportunity they have cut the operating budget of the IRS. This elicits cheers from a lot of people; I mean, who likes to pay taxes? But the IRS doesn't make the rules, Congress, abetted by the President, makes the rules. And those rules, despite regular pledges by people running for office to simplify the rules, just get more convoluted and Byzantine all the time. And the IRS has fewer and fewer resources to keep track of all the rules and to be able to track down those who avoid their legally due tax bill. 

Something you'll hear from time to time is that it's the ultra-rich who are the ones who are sliding out from under their full tax burden, while it's the lower income people who get hit with interest and penalties. Part of the problem is that for lower to middle income people the ways to avoid taxes are few and straightforward. Someone gets a second job and is paid off the books, or takes an occasional cash gig. About twenty years ago I was delivering newspapers in the early morning and didn't report the income. The newspaper, however, sent copies of the 1099 to the IRS and I got caught. The interest and penalties added up to close to half of the added gross income that I had earned at that second job since this extra money was added on to what I was already earning at my regular job. I didn't have a leg to stand on since it was without question taxable income. Someone who has earnings in the millions or billions has more tax avoidance options than simply not reporting income from a second job, and those options are usually more complex.

One popular way for the super wealthy to avoid taxes is to have access without actual earnings. Billionaires routinely finance their lifestyles by taking out loans with their stock holdings as collateral. Since unrealized stock gains are not taxable until the stock is actually sold, they are living off loan proceeds, which are paid back with the profits from appreciated stock value (that's taxed, but a small portion of what they're living off). The very rich often own a web of interlocking limited liability companies (LLCs) which, if you have a smart accountant, can have a paper loss. LLCs are what's known as "flow-through entities", whereby the profit or loss "flows through" to the owners. The loss is often borrowed money anyway, but the loss that flows through reduces the owner's tax bill. Then there's deductions and credits for various reasons that may or not be legitimate, but with not enough staff to sift through it all, and definitely not enough staff competent enough to decipher the complicated accounting, the billionaires are rolling the dice that they won't get caught. So, not only do the Daddy Warbuckses of the world have more options to shelter their wealth from taxation, they are less likely to get caught when they cheat. 

One thing that gets reported as sort of a scam, but really isn't, is depreciation. In a business, taxes are paid on the profit, which is gross revenue minus expenses. With large asset purchases, however, business are required to spread that expense over the useful life of the asset. The useful life varies from 39 years for buildings, down to 5 years for laptop computers. The simplest type of depreciation splits the expense into equal amounts over the life of the asset. It's not a way to get out of paying taxes, and it doesn't equate to getting your asset for free, it's just a way to spread out the tax benefit of a large purchase. 

Part of the recent large bill passed by the Senate Democrats was to increase the IRS budget by $80 billion over 10 years. The Republicans are screaming that this will mean 87,000 new auditors who will target middle income Americans and small businesses. While the 87,000 number of employees is mentioned in a recent Treasury Department report, the increased budget will not only go toward hiring, which will include not only auditors and other enforcement agents, but IT and customer service positions, and also toward technology upgrades, which are sorely needed and it's slated to be spread over 10 years, when around half the current 72,000 IRS employees will be eligible to retire. 

The IRS is not the problem. They are merely the agency tasked with carrying out the laws that Congress has passed and the President has signed. 

Time to Make the Sausages

The great architect of German unification once compared legislating to sausage-making, commenting that you really wouldn't want to watch either one being made. Politics is not pretty. Politics is not simple. Politics is more complex than everybody "just doing the right thing"...whatever that is. 

Somehow we have gotten to the point where the populace assumes that everybody in one party is going to agree on everything and everyone in the other party is also going to agree, but on different things. There's also a misapprehension that the President, by virtue of being the titular leader of his party, has the power to dictate policy to the Congressional members of his party. (I'm consistently using the male pronoun mainly because we haven't [yet] seen any women elected President) Part of this confusion comes from the term "Commander in Chief". The President is not the Commander in Chief of the United States, but according to the Constitution, the Commander in Chief of the Army and Navy of the United States and of the militia of the several states when called into actual Service of the United States. In other words, he sits atop the chain of command of the U.S. military. And the Constitution gives the President this authority in order to avoid military control of the government, giving a civilian ultimate military authority. The members of Congress are in no sense in that chain of command, or in any way subordinate to the President, and as a matter of fact, as a body, the Congress is the equal constitutionally, to the President. 

The two party system of government is to be found nowhere in the Constitution, but it has evolved to become the de facto system nonetheless. Because real power is concentrated in this dyarchy, effectively shutting out additional parties, the two main parties function as "big tent" entities, home to a variety of ideologies that coexist, often uncomfortably. Since the election of Joe Biden and the attendant Democratic Party majorities in Congress, there has been an expectation among progressive Democratic voters that "things would get done", presumably a wide-ranging progressive agenda. The problem is twofold: (1) The filibuster in the Senate and (2) Multiple factions within the Democratic Party. 

A few months ago I was "laugh emojied" for suggesting that the Republicans were united in opposition to anything the President tried to accomplish, while the Democrats were fragmented. The person who disagreed with my assertion asserted himself that the Democrats were taking their orders from central authority that had them all marching in lockstep. Even a cursory scan of political news should disabuse one of this opinion, unless of course the belief in some secret conspiracy that controlled both parties was too difficult to let go of. The modern Democratic Party is usually portrayed as having a "progressive" wing and a "moderate" wing, with a few outlying "conservatives" like Joe Manchin rounding out the circus. The truth is a lot messier. Every single member of Congress has their own unique constituency that they cannot aggravate too much or they won't be reelected. Senators from large populous states have the additional challenge of balancing the interests of their urban and their rural voters. 

Vote trading has long been a staple of legislating. Senator "A" might be inclined to vote for Bill "X", but will withhold her vote unless amendment "Y", benefitting her state, is added. Senator "B", on the other hand, might be persuaded to vote for Bill "W", which he had doubts about, but whose "yes" vote will carry the day, if Senators "C", "D", "E" & "F" agree to support appropriating funds for a military base in his state. 

This is just what's been happening in the halls of Congress lately. Media reports focus on Senators Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, on his seemingly un-Democratic conservatism and her supposed wackiness, and the allegations that both of them are in the pocket of special interests. This is mainly because they both appear to be the last two holdouts in any intra-party negotiation, and they are the two who are most vocal about retaining the filibuster, which prevents bills being passed by less than 60 votes if their are minority party objections. Bills do not spring fully-formed from the brow of Joe Biden, but are the result of hours and days and weeks of negotiation in order to address concerns from multiple directions. Surprise! Not everybody agrees on everything!