Doctors who owe back taxes, homeowners who overstate their mortgage interest deduction, and corporations that avoid U.S. taxes are finally receiving the legislative protection they so richly deserve.
For months now, congressional Republicans outraged by the IRS's scrutiny of Tea Party groups have been undermining the agency's ability to crack down on tax cheats. In June, the House GOP proposed reducing the IRS’s budget by $341 million. They also voted to slash the budget of the IRS’s enforcement division by 25 percent, equal to $1.2 billion. Such steep cuts, the Associated Press’s Andrew Taylor wrote, “would mean fewer audits of taxpayers and make it more likely that people who cheat on their taxes will get away with it.”
Now, Politico reports that House Republicans are blocking legislation to give the IRS greater authority to collect back taxes and catch cheaters. “[Republicans are] balking at a Senate plan to go after doctors who owe back taxes and another to make it easier to figure out if someone is overstating the mortgage interest deduction,” Brian Faler writes. “They also won’t accept an effort to cut the number of people wrongly claiming a child tax credit.”
Republicans are also blocking legislation to close a tax loophole that allows corporations to avoid U.S. corporate income taxes. The practice is known as tax inversion. As New York Times columnist Paul Krugman describes in his column Monday, companies use this strategy to “relocate” to a country with a much lower corporate tax rate, thus avoiding the U.S. corporate tax until they repatriate their profits. But these firms aren’t actually physically relocating. They’re simply buying a foreign subsidiary so that they can claim tax residence in the low-tax country. Everything else remains the same—except they avoid the U.S. corporate tax.
Over the past few months, more and more companies have begun using tax inversions to lower their tax bills. On July 18, AbbVie, a Chicago-based pharmaceutical company, agreed to buy the U.K. drug maker Shire for $54 billion, with the explicit goal of reducing its U.S. taxes. It was the largest tax inversion deal on record. Meanwhile, Walgreens is reportedly looking into using this tax loophole as well.
Democrats have introduced bills in both the House and Senate to crack down on these tax inversions. President Barack Obama, in Los Angeles last week, and Treasury Secretary Jack Lew, in the Washington Post Monday, have called for Congress to take action. Republicans have argued that any changes to corporate tax law should come through comprehensive reform, not a short-term patch. But considering that Congress can barely pass bills to address domestic crises at the moment, corporate tax reform isn’t happening anytime soon. Thus, the effective GOP position is to allow this tax avoidance to continue.
A few members within the GOP have recognized this and expressed an interest in closing the loophole. “There may be steps Congress can take, short of comprehensive tax reform, to address corporate inversions, and related issues,” Orrin Hatch, the ranking member on the Senate Finance Committee, said. But those voices are rare in the GOP.
It’s obvious why Republicans are so hostile to closing tax loopholes and cracking down on tax cheats: the IRS scandal, in which conservative organizations received inordinate scrutiny from the agency as it vetted groups claiming to be “social welfare organizations.” Republicans argue that the agency cannot be trusted. “There’s not a whole lot of confidence right now about what the Internal Revenue Service does among the American people, let alone members of Congress,” Rep. Pat Tiberi told Politico. “Why should we give them more tools to harass taxpayers?” This doesn’t make much sense. Democrats are not proposing to expand the IRS’s purview, only to give it the resources to do its job. It is certainly unacceptable for the IRS to target certain ideological groups and its email snafu is embarrassing, but both incidents are irrelevant to the debate over closing tax loopholes.
Republicans also argue that closing the tax inversion loophole would not bring in much revenue, around $20 billion over the next ten years. But tax avoidance is a big problem for the federal government. The Treasury Department estimates that for every additional $1 in spending on the IRS, the agency collects $6 in additional revenue. Much of that comes from closing the nearly $400 billion annual gap between what Americans owe in taxes and what the federal government actually collects. To put that in perspective, the Ryan Budget cuts spending by just over $5 trillion over the next decade. In other words, the IRS could accomplish nearly 80 percent of the deficit reduction in Ryan’s plan just by closing that $400 billion tax gap.
Instead, Republicans have decided to obstruct the IRS in any way they can, once again proving that their deficit concerns are more a convenient excuse to cut spending than a deeply held principle.
Danny Vinik is a staff writer at The New Republic.