(Kent Nishimura / Los Angeles Times via Getty Images)
The Internal Revenue Service (IRS) will receive an $80 billion cash injection over the next decade, as part of the Inflation Reduction Act signed into law by President Joe Biden on Aug. 16. The significant boost in resources has many wondering what a beefed-up IRS could mean for Americans.
There has been a conservative talking point gaining mainstream traction that the IRS will allocate the funds to hiring 87,000 armed IRS agents. Ronna McDaniel, head of the Republican National Committee, tweeted, “How long until Democrats send the IRS ‘SWAT team’ after your kids’ lemonade stand?”
Here’s what’s actually happening.
The United States government’s actions point toward implementing a heterodox economic theory called Modern Monetary Theory (MMT). The reason it’s heterodoxical is because this financial model is outside of the traditional mainstream economic policies that have driven the U.S. over its history.
Proponents of MMT say that the U.S. federal government has the power to spend, borrow, print money, tax and control all the financial levers of power. Unlike a family’s budget, it has the unrestricted ability to print as much money as it wants.
Critics warn that profligate spending leads to inflation. This has already happened. As trillions of dollars were injected into the economy during the pandemic, government stimulus checks, the Paycheck Protection Program and enhanced unemployment benefits, along with the Federal Reserve Bank that artificially kept inflation rates low, created a 40-year record-level high rate of inflation.
Jerome Powell, the head of the Fed, and Janet Yellen, U.S. Treasury Secretary, initially mistakenly said the inflation was “transitory.” In hindsight, they were wrong in their analysis. Powell, recognizing the dilemma, announced plans to cool down the economy to whip inflation.
To dampen the economy, Powell is raising interest rates and withdrawing all the quantitative easing policies that were in place. In a more fiscally restrictive environment, businesses will feel the pain.
They won’t have access to cheap funds, and their costs are rapidly rising. One of the intended results is that businesses will enact massive layoffs. On a nearly daily basis, companies are announcing layoffs, hiring freezes, allowing attrition without replacement and rescinding job offers.
As people lose their jobs, they’ll spend less money. As consumers close their pocketbooks, businesses will earn less money. As this happens at scale, the economy contracts, causing a downward spiral. For example, interest rates on purchasing a home nearly doubled recently. The housing market went from people bidding over the asking price to families walking away because they couldn’t afford to pay the higher monthly mortgage rates. Housing is one of the largest sectors. If people cannot buy homes, there will be less need for architects, real estate agents, contractors, electricians, carpenters, plumbers and other blue-collar professionals.
According to MMT, taxes levied on the American public is a great way to suck money out of the economy, dampening growth. There is talk about the rich billionaires and large corporations being made to pay their fair share of taxes. According to a Treasury official, the resources will be used to “crack down on high-income and corporate tax evaders who cost the American people hundreds of billions of dollars each year.”
It’s somewhat disingenuous for the government to believe that it can squeeze money from this cohort. They have the financial war chest to hire the best and brightest accountants, tax professionals and attorneys. The ultra wealthy and large corporations have access to all the loopholes to shelter their money and legally avoid paying a large percentage of their earnings in taxes.
This leaves the working and middle classes. Most Americans are not sophisticated in the arcane world of taxes. They don’t have an army of legal, financial and accounting teams to help them out.
Anyone who files their own taxes or reviews the paperwork their accountants give them understands that it’s too complicated. Without meaning to, due to the complexity of the tax code, most families likely make mistakes on their forms.
Many small businesses, such as pizzerias, bars, nail salons and others, work on a cash basis. With razor-thin margins, they may play fast and lose with the numbers. IRS agents will most likely target these groups, as they’ll have a better chance of extracting money from them than taking years to fight a billionaire or a major global conglomerate over a tax dispute.
With the increase in funding and resources, there is likely to be more audits and Americans will end up paying a great amount of money in taxes, along with penalties. Though Natasha Sarin, a counselor for tax policy and implementation at the Treasury Department, says differently. “Let’s be very clear about what these resources are and are not doing,” Sarin said. “These resources are not raising audits on any small business or any household that makes under $400,000 a year.”
Even if this doesn’t happen, the thought of being audited may make people decide to be scrupulously honest this year to avoid the wrath of the tax collector.
Either way, a great deal of money will be taken out of circulation, due to the focus on tax collecting. The sucking of billions or trillions of dollars is a feature of MMT and will cool down the economy, as people have less money to spend.
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