On 16 August 2022, President Biden signed into law a $740 billion bill that focused on climate, health care and tax increases and was called the Inflation Reduction Act and oh-by-the-way provides an extra $800 billion to the IRS to hire 87,000 new agents. Only in Washington could they product anything that dumb.
The “dumb” part is that this is another one of the mega-bills, 750 pages, that no one read before they voted on it. If the $80 billion for 87,000 new IRS agents had been a stand-alone bill, it would have had to pass muster in Congressional committees in both the House and the Senate with expert testimony and we-the-people would have known what was coming, been informed of the pros and cons and been able to dial in to our Congressional Delegations. But no, that makes too much sense. Now it’s the law and I have not heard anyone who believes there is anything positive about adding 87,000 agents to the current IRS force of about 90,000. “As government expands, liberty contracts.” President Reagan. So, what can we do about it?
First, let’s take a look at how the IRS is doing these days? The Wall Street Journal and various other open sources recently shed some light on their capabilities or lack thereof: Here is a summary of some reports from the Treasury Inspector General for Tax Administration:
Last year the IRS answered only about 10% of taxpayer calls.
There is a backlog of 17 million unprocessed tax returns.
$19 billion, 28%, of earned-income tax credit payments in FY 21 were “improper.”
67,000 claims, $15.6 billion, for low-income housing tax credit from 2015 to 2019 “lacked or did not match supporting documentation due to reporting errors.”
A May 2022, audit found that 26%, $1.9 billion, of its American opportunity tax credits for education expenses were improper in FY 2021.
27%, $541 million, of its net premium tax credits (Obamacare) were improper in FY 2019
May, 2022 audit,13%, $5.2 billion of its enhanced child tax credit payments were improper.
September, 2020, the IRS issued 89,338 notices to taxpayers insisting that balances were owed even though the taxes were not actually due.
February, 2022, audit found the IRS department responsible for ensuring retirement plan tax compliance suffered a 23% decline in the quality of its examinations from 2018 to 2020,
In 2010 the Congress passed the Foreign Account Tax Compliance Act to identify wealthy Americans using undisclosed foreign accounts. The intent was to raise $9 billion in revenue by 2020. An April 2022 audit showed the IRS has spent $574 million to implement the law and had found only $14 million in revenue. STOP, and reread those last two sentences that deal with intent and results. Amazing!
In 2010 the IRS began a program to examine returns from “high income” individuals (those with incomes of over $200,000). But from FY 2015-2017, 73% of the targeted returns were for those earning less than $200,000. Again, intent and results mismatch, aka gross mismanagement with little or no leader oversight.
In the past seven months the Treasury Inspector General has issued damaging reports on IRS mismanagement of its partial-payment program for delinquent taxpayers, for its auditing of partnerships and its struggle to handle internal employee misconduct.
In those twelve short pieces of information, we see a clear picture of an organization in chaos with low standards, ingrained mismanagement and little or no viable leadership. In spite of this reality, Congressional Democrats and the president believe it is a good idea to spend $80 billion, that we don’t have, to double the size and weaponize one of the most inept, inefficient departments in the government.
HAVE WE EVEN PROPERLY DEFINED THE IRS PROBLEM?
The most pathetic issue here is that the IRS’s day-to-day performance standards stem from a big-government, over-regulated, bloated bureaucracy. Is the IRS’s problem that they are short 87,000 employees? Of course not, but the Congress and the president continue to believe that every problem can be solved by throwing thousands of bureaucrats and billions of dollars at it.
What the Congress, at the encouragement of the Executive Branch, needs to do is define the base problem first. Then, and only then, develop a specific plan to fix the problem.
THE PROBLEM:
According to the Public Law 117-154 (23 June, 2022), the U.S. Tax Code is 6,871 pages. But when you include the federal tax regulations and the official tax guidance, it rises to approximately 75,000 pages. That’s the problem.
HOW TO FIX THE PROBLEM:
First, how NOT to fix it. Do not appoint a special commission to “fix” it by working their way through 75,000 pages adding, subtracting and rewording. Doing so will probably result in an even worse 80,000-page document.
Instead of trying to fix it, hit the delete button, all 75,000 pages, and start over with a clean sheet of paper. Start out with a long-range strategic planning maxim; that is, begin at the end. In this case define the dual end state factors first. After that, plan for the specific issues: how much tax, what types of tax, how are they divided up among taxpayers and who/how it is to be administered (IRS).
Dual end-states: First is the alignment of overall annual government budgeted requirements with accurately projected revenue. The second is based on the assumption that few, if any, Americans can accurately articulate what the current Tax Code is about. What we need to end up with is a new Tax Code that can be read in a few minutes and understood by every taxpayer in America. Both are within the art of the possible as follows:
NEW TAX CODE, CHAPTER ONE, INDIVIDUAL GROSS INCOME:
All taxes will be based on individual gross income. So. the first thing is to define exactly what constitutes individual gross income, how it is derived, how it is reported and how it can be verified. Also begin with a threat of very harsh penalties for anyone who is caught hiding or misstating their gross income. Fear of going to jail is a powerful incentive.
CHAPTER TWO, TAX DEDUCTIONS:
The current 75,000 pages of tax Code/regulations undoubtedly contains hundreds of possible deductions. Therein lies a big part of the problem and requirs thousands of IRS employees to deal with it.
Under this plan there is one and only one authorized deduction from personal gross income; charitable contributions. But the charities have to be real and operate under a strict set of standards in order to qualify.
The Bill, Hillary, and Chelsea Clinton Foundation’s tax return, 2014, provides a perfect example of a charity that would not qualify as tax deductions by donors.
In 2014 the Clinton Charitable Foundation total revenue (rounded numbers) was $178 million. From that, actual grants to charity amounted to about $5 million; THREE PER CENT. Most of the contributions went for exorbitant salaries and expensive travel.
This Tax Code chapter must include standards for a charity to qualify for a tax deduction. For example, grants to charity must be at least 60% (or whatever the correct number should be) of charitable revenue for an organization to qualify.
Every charitable organization would be required to submit income and expenditures annually to the IRS and be subject to audits. For each tax year the IRS would publish the list of qualifying charitable organizations to be cross-checked with individuals’ tax return deductions. This will guarantee every doner that their money is actually going to a worthy cause. If the charity can’t pass the smell test and make the annual IRS list, they will quickly be out of business.
CHAPTER THREE, CORPORATE TAX:
Let’s begin this discussion with a fact: corporations do not pay taxes, people pay taxes. The so called “corporate tax” is, to the corporation, just another cost of producing a product. The “tax” is no different than the cost of raw materials, salaries, marketing, etc. The money that a corporation pays to the government in taxes, has already been passed on to workers (lower wages) and customers (price of the product).
So, let’s do away with all that nonsense and the hundreds of millions of dollars that businesses spend on accountants and lawyers to compute their tax returns.
Under this plan, there will be no corporate taxes. There is another way, a more sensible way, to turn corporate income into government tax revenue.
Let’s say for example that General Motors has a very good year. As a result, they might raise wages and salaries, hire a few hundred new employees, build a new plant (future wages/salaries), pay more/higher bonuses to their top performers, and pay higher dividends to stockholders. All of those corporate actions will translate into higher individual gross personal income for thousands of tax payers. Bottom line, the government gets their revenue, the corporations’ products become more competitive in the global marketplace and the gross domestic product goes up.
Therefore, under this new tax plan “corporate tax’ gets explained in a sentence (no corporate tax) instead of thousands of pages of tax regulations. And, perhaps more importantly, corporate tax will no longer be a political yoyo under a tax-and-spend administration.
Taking taxes off the table for businesses and corporations has many positive residual effects. As an example, in 2017 President Trump cut corporate taxes from 35% (highest in the world) to 21%. Economists predicted one of the positive delayed impacts would actually be increased tax revenue rather that reduced federal income. They were correct because cutting corporate taxes resulted in higher wages, hiring went up, businesses expanded and generally the entire economy grew and pushed government revenue to the highest levels in history.
Taking corporate taxes to zero will cause an economic revolution: overseas manufacturing will come back to the U.S., we will be less dependent on China, wages will go up, unemployment down, those who can work will be forced off the welfare rolls, GDP will increase and overall government revenue will shoot up.
CHAPTER 4, CAPITAL GAINS TAX:
Capital Gains Tax is currently a separate tax that is levied on profits an investor realizes when he/she sells a capital asset for a price that is higher than the purchase price.
As of 2021, the long-term capital gains tax is typically either 0%, 15% or 20% depending upon your tax bracket.
Under the new Tax Code there will no longer be a separate tax on capital gains. If you invest $10,000 and can prove it and then sell it for $15,000 at a later date, that is simply a $5,000 addition to that year’s gross income that may or may not put you in a higher tax bracket.
Capital losses occur when an investment is sold for less than its original purchase price. Under the new Tax Code this will have zero bearing on your taxes. Why should you get a tax break for making a bad decision and losing money? As they say, “Life is hard and then you die.” Deal with it.
This simplified formula for Capital Gains Taxes also does away with the Biden-proposed nonsense of taxing Capital Gains on investments that have not yet been sold.
CHAPTER 5, DEATH TAX, aka Estate or Inheritance Tax:
Death taxes are the most morally corrupt initiative in our government. Therefore, in the new Tax Code there will be no such thing as a Death/Estate/Inheritance Tax.
Death Tax is a tax on your right (even though you are now deceased) to transfer everything you own at the time of your death.
The Death Tax habitually hits rural America especially hard. Farmers and ranchers generally fall into an economic category of being, “land rich and cash poor.” Agricultural land has almost always increased in value over time; that’s the good news (land rich). The problem with agri-business is that there is little or no consistency in profitability from year to year. Perhaps last year’s harvest put a pile of money in the bank. But this year a 30-minute violent hail storm will cut your soybean yield by 50%. Right now, in Southeast U.S., a sustained drought has cut the 2022 projected cotton harvest by 50%. A year ago, no farmers were anticipating that the anhydrous ammonia fertilizer they would need in 2022 would go up by $86,000 for 1000 acres of crop, (cash poor).
So, Mom and Dad pass away and the two kids now own the farm; a farm they love, where they labored as youngsters and where their children might someday want to farm. But both middle-income kids have a house mortgage, car payments, some student debt and a couple overdue credit card payments. No way they can dig up a few hundred thousand dollars to pay the Death Tax. They have no choice; they have to sell.
This is unamerican government-greed insanity. Under this proposed Tax Code, you inherit it, you own it; period. Do what you want with it, not what the damned government tells you what you must do.
CHAPTER SIX, TAX BRACKETS:
The concept of operations for this plan is to divide personal gross income into many brackets ranging from zero to billions of dollars. That could end up to be a lot of pages depending on how small each bracket is. The good news is that the individual taxpayer only has to refer to one of those pages; the one that lists the tax rate for their particular gross income.
The brackets would be “progressive” but also careful to not disincentivize a taxpayer. True story: An acquaintance of mine is a successful upper-level executive in France. She told me that upon getting a promotion resulting in greater responsibility and longer working hours, the salary increase put her into a new/higher tax bracket; the result, her net take-home pay actually was less than before the promotion.
THE TAX CODE MODEL (with illustrative numbers)
First, define the gross income brackets. For example,
-Zero to $100,000 in increments of 25K.
-100K to one million, increments of 100K.
-One mil to 10 mil, increments of one million.
-10 mil to 20 mil, increments of two million.
-20 mil to 100 mil, increments of 10 million.
-100 to one billion, increments of 100 million.
-Remaining increments of $500 million each.
That’s about 45 brackets but the number is immaterial to the Tax Code model; it could be more or less refined than that.
Secondly, determine the number of taxpayers in each bracket. After the first year under the new Tax Code that will be easier to do and should be updated every year.
Third, begin refining the first model with a working end state number; that is a budget of $4 trillion. Then beginning at $25K gross income (zero to $25K is tax rate zero) determine a common tax rate, for example, 7.28%, that, applied to every taxpayer, will get you to the $4 trillion end state.
An alternative model would consist of progressive rates; for example, 7.28% for the second bracket, $25K to $50K. Then adjust the rate upward by one half % for each bracket. Using the above brackets, the tax rate for $1 million gross income would be 12.78% etc. and the rate for $1 billion gross income would be 28,78%.
With an agreed-to set of brackets, tax rates per bracket and the number of taxpayers per bracket the model is set and could literally spit out an updated Tax Code in seconds or minutes.
So, the president submits his budget to Congress the first Monday in February. February-September Congress works to publish a final Congressional Budget Resolution by 30 September. Let’s say the budget is $4.436 trillion beginning the fiscal year on 1 October.
Put that end-state budget number into the Tax Code model and work backwards from $4.436 trillion to determine the exact tax rate for every taxpayer in the country for the following year.
Today taxation is a complete mystery to almost every taxpayer. We all live with the “April surprise” when our tax accountant tells us how much we owe or will get as a refund. No more April surprises. Now the family can sit down at the kitchen table, work their annual family budget and know exactly what their tax burden will be.
Monthly withholding taxes should result in a consistent flow of revenue to the government and rarely should there be an April surprise tax due or a refund. That should reduce the IRS personnel requirement by tens of thousands.
Remember when President Trump reduced taxes for everyone and the Democrats all called it “A tax cut for the wealthy”; those days would be over with total tax obligation transparency.
BACK TO THE IRS:
The “problems” with the IRS is not that they don’t want to do a good job. It is also not that they are short 87,000 employees. The problem is the ridiculous 75,000-page tax system. Fix the system, transform America. Perhaps the IRS, under this system may only need a few thousand folks; certainly not the current 90,000 or the requirement for 87,000 new hires.
BALANCED BUDGET:
Fixing the IRS should not be a stand-alone effort. It can also present an opportunity to pass a Balanced-Budget Amendment. In just the past fourteen years the national debt has increased from $10 to $30 trillion and there is no relief in sight. The total transparency of tax and revenue with this new tax plan will provide the opportunity to fix our current deficit spending mania.
Congress, whatever party is in power, has clearly demonstrated they do not have the discipline to control spending. We do not have a revenue problem; we have a spending problem. A Balanced-Budget Amendment to the U.S. Constitution would constrain total government spending to be less than or equal to total tax collections. Given Congress’ predilections towards annual deficit spending, it is the only way we can get our national debt under control.
REDUCE SPENDING:
There could be a snowball effect to this effort to fix the IRS and the tax system. It could cause us to look at the size of the entire government bureaucracy and where the bloated government budget comes from.
There are tens or thousands of government regulations on the books that are a drag on the economy, no longer applicable or downright damaging. The fact is that every regulation has to be administered by some branch or division within the government (hence the bloated bureaucracy) and each one has an annual budget. The sum of all spending requests become the president’s annual budget to Congress.
FYI in a recently published book, Fix the Systems, Transform America, Chapter 4,there is a detailed plan to clean out the Executive Branch bureaucracy and drastically reduce needless government spending.
CONCLUSIONS:
This essay began with the assertion that President Biden’s new law which provides an extra $80 billion to the IRS to hire 87,000 new IRS agents is beyond ridiculous and completely unnecessary.
But, in a larger sense, the new law is illustrative of the way our government does business; one nit-pick at a time and by throwing billions of taxpayer dollars at it. They appear unable and/or unwilling to look at the larger picture and approach problem-solving by fixing the system in its entirety.
Alignment of the government’s calendar (fiscal-year budgeting and calendar-year taxing) would be a helpful step.
Reality tells me a simplified, understandable, transparent tax system as described above will probably never see the light of day. Two reasons; the lobbyists representing lawyers and accountants will go crazy and shoot it down. Also consider that 43% of members of Congress are lawyers.
BOTTOM LINE:
If our great nation is to survive, we-the-people have to speak up and be heard. If you agree with the above concept of operations, please send a copy to your Congressional Delegation.
We-the-people can dream and plan. Perhaps a
future tax return could simply consist of
a post card and a check.
Marvin L. Covault, Lt Gen US Army, retired, is the author of VISION TO EXECUTION, a book for leaders, and a new book May 2022, FIX THE SYSTEMS, TRANSFORM AMERICA as well as the author of a blog WeThePeopleSpeaking.com.