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ALEX KAUFMAN: It’s extremely exciting that there will be any large-scale investment enacted through reconciliation. As a starting point in federal climate policy, the IRA is huge. According to an analysis by the consultancy Rhodium Group, which does emissions modeling, the IRA will have a significant effect on the trajectory of US emissions over the next decade. But the scope of this bill is far from matching the severity of the climate problem. The initial Build Back Better [BBB] bill that the Biden administration put forward was already a serious compromise from what a lot of progressives were looking for. The second, pared-down version of that bill was an even further compromise, and the IRA is a compromise from there. It represents a fraction of the $10 trillion that researchers agree rapid decarbonization would require. It includes many incentives for the fossil fuel industry that have debatable impacts. So the bill definitely pushes us in the right direction, but with important caveats.

Adding to the extensive list of the complexities surrounding cap-and-trade is the extreme difficulty of enforcement. A carbon tax identifies every person as a polluter, whereas a cap-and-trade only identifies select industries as polluters.170 Under cap-andtrade, monitoring creates many unseen costs and difficulties. Administrative costs are often overlooked, but remain crucial when looking at the costs of emission-reducing actions. The costs of establishing the cap-and-trade program include, but are not limited to, educating the targeted industries, monitoring emissions and compliance, and enforcing the policy.171 To reduce costs as much as possible, regulators must strive for minimal administrative efforts. This usually means that approaches that require monitoring fewer parties and use more readily available information are the most favored.172 This leads to a tradeoff between the extent of a program’s coverage of emission sources and the administrative costs in order to achieve administratively simpler programs. New costs will continue to appear in the creation of a nation-wide cap-and-trade program, but an additional concern lies in our monitoring technologies. In capand-trade, an elaborate system would need to be created to distribute and collect allowances to prevent cheating. This is an extremely difficult and complicated task. Effective measures to penalize those that emit without allowances may be even more difficult. Cap-and-trade will require the creation of a completely new governmental body to take on these administrative and monitoring activities.173 The carbon tax, on the other hand, can be enforced by the IRS and the EPA with their existing staff and extensive experience dealing with excise taxes and clean energy, respectively.

Some researchers argue that a broad-based border adjustment under a carbon tax would incur a prohibitively high administrative burden.51 But this position has rarely been supported by empirical analysis due to a lack of data on environmental tax policies’ administrative costs. In view of the GAO estimates, implementing a broad-based border adjustment under a carbon tax may not be as onerous as skeptics think.

President Joe Biden said he would veto the first bill passed by the newly Republican-led House of Representatives, which would significantly cut funding for the Internal Revenue Service. House Republicans on Monday passed the Family and Small Business Taxpayer Protection Act by a vote of 221-210 along party lines. The bill would repeal a portion of the 2022 Inflation Reduction Act, passed by Democrats in Congress, that gave $80 billion to the IRS to increase enforcement, modernize internal systems, and replace retiring employees. The government would lose an estimated $185 billion in revenue over the next decade if the bill became law due to a lack of financing for infrastructure to ensure that individuals and businesses pay the taxes they owe. Republicans in Congress have repeatedly mischaracterized how the new IRS funding would be used, and have falsely claimed that IRS auditors would be targeting middle-class taxpayers, even suggesting that most of the agents would be armed.

Sen. Ron Wyden, the Democratic chairman of the Senate Finance Committee, said a decade of Republican-led budget cuts gutted the IRS. “The only way that House Republicans could make it any more obvious that they’re doing a favor for wealthy tax cheats is by coming out and saying it in exactly those words,” Wyden said. “This bill is going nowhere in the Senate.”

One major hurdle for the Republican Party and its plans to target IRS funding is the likelihood of any attempt to rescind the money succeeding. Despite the GOP-controlled House voting to pass the Family and Small Business Taxpayer Protection Act on Monday, it will almost certainly fail to clear the Democrat-controlled Senate. Biden could also use his veto powers to block any attempts for the GOP to dissect his Inflation Reduction Act, which he considers one of the biggest accomplishments of his presidency so far. Tony Reardon, national president of the National Treasury Employees Union, said that the GOP plans to target the new IRS funding is "short-sighted and destructive" as well as being a "stunt" which is destined to fail.

Following Alesina and Rodrik’s paper redistribution is defined here as any policy that reduces the incentive to accumulate. Taking growth maximizing policies as a benchmark has its virtues since people appear to have difficulties disentangling the relationship between utility enhancing income growth and the distribution of income at each point in time. See, e.g. Amiel and Cowell (1999). Thus, any policy s5^s redistributes and lowers growth in the model.19

This Article challenges the double-distortion argument from a law-and-economics perspective. In particular, the Article contends that legal rules should be used to redistribute income, in addition to taxes and transfers. Two main reasons justify this conclusion. 7 First, there is no a priori reason why a legal rule that redistributes income should always be distortionary - a necessary condition for the double-distortion argument to be true. Indeed, it is easy to devise examples where a change in legal rules will both redistribute income and increase efficiency. More generally, there is nothing inherent in the concept of redistribution that requires such a change to be accompanied by an efficiency loss. Within economics, redistribution is defined simply as a reduction in inequality. Consistent with this definition, it is possible for a redistributive legal change to be either inefficient or efficient - even in the Pareto sense, where no one is worse off and at least someone is better off. 8 Since a legal change that meets such conditions both reduces inequality and not only is nondistortionary but increases wealth, it is unambiguously superior to redistribution through the tax and transfer system, which is always distortionary. 9

Redistribution is defined as "the act or process of distributing something again or anew." Redistribution, Black's Law Dictionary (10th ed. 2014). This Article: adopts a broader meaning, expanding on Nancy Fraser's definition, which follows: The remedy for economic injustice is political-economic restructuring of some sort. This might involve redistributing income, reorganizing the division of labour, subjecting investment to democratic decision-making, or transforming other basic economic structures. Although these various remedies differ importantly from one another, I shall henceforth refer to the whole group of them by the generic term redistribution. Fraser, supra note 20, at 73.

Some of the new law's provisions will no doubt affect the taxes of the rich (and other taxpayers) indirectly. For one thing, the law provided billions in new funding for the IRS. This, in turn, will lead to more frequent and stringent audits that can ultimately result in higher taxes. Additionally, increased taxes on corporations may affect those with stock ownership. These tend to be higher-income individuals, although average workers' 401(k) plans and pay raises could also be affected. And other corporate entities affected by the bill claim their increased tax burdens will be passed on to taxpayers. But overall, rich taxpayers, for the most part, were spared the specific or direct increases in taxes initially envisioned by Democratic leaders. The average American, on the other hand, would not have minded if the law had increased taxes on the rich. Americans tend to be more likely than not to favor higher taxes on those with high incomes. This fact of life has been well-established across a wide variety of public opinion indicators over the years.

There are lots of different ways to see it. According to the Americans for Tax Fairness tax fairness means making corporations and wealthy individuals “pay their fair share.” For those at CATO, tax fairness is an Alternative Minimum Tax (or flat tax). Ultimately, though, tax fairness is a normative–and subjective–concept. It’s helpful, then, to consider what society as a whole considers fair. People’s opinions about this question matters, not only in a theoretical sense, but also because we want to maximize society’s happiness overall. To accomplish this, we need a tax system that aligns with society’s preferences. While people do not have homogeneous preferences on tax fairness, economists have found that people generally prefer greater societal equity established through the tax code. Senator Tom Coburn, a Republican from Oklahoma, has articulated tax fairness this way: “An individual’s or corporation’s tax rate shouldn’t be dependent on their ability to hire a tax lobbyist. It’s especially wrong to ask families who are struggling to make ends meet to subsidize special breaks for corporations.” Are taxes in the United States “fair”? The top income tax bracket in America is now about 30 to 50 percent below what it was under Eisenhower, Nixon and Ford—when the country was a great deal more equal. The top marginal income tax rate is a little below 35%–compared to 70% before Reagan took office. The marginal tax rate, the rate on the last dollar earned, is not the same as the effective tax rate, which includes taxes on capital gains and pensions, and removes money on government payments, including Social Security. According to the IRS the effective federal income tax rate for the Fortune 400 fell from almost 30 percent in 1995 to just below 17 percent in 2007. Yet the true effective rate is even lower than government statistics suggest because those figures fail to include income generated by tax avoidance strategies. In many of these strategies, the earner will borrow money against their assets and then never (or indefinitely push off) repay. Other executives—like Phil Knight of Nike, Jeffrey Immelt of GE, and James Gorman of Morgan Stanley—have left future earnings to children without paying estate tax by setting up Grantor Retained Annuity Trusts. And then there are the many complicated accounting strategies involving secrecy jurisdictions that also contribute to millions in evaded and avoided taxes. In 2008 the Government Accountability Office found that of the 100 largest corporations, 83 have subsidiaries in tax havens. In 2004 U.S. multinational corporations paid about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings – an effective U.S. tax rate of about 2.3%. Why does it matter? A regressive tax system raises money from those who have the least of it. Beyond the distributional impacts and ethical implications of a regressive system, these tax systems generally increase income inequality and may contribute to lower economic growth. In America, an unfair tax system is particularly important as society has become more stratified. Meanwhile, generally society would prefer more equality, not less. Over the last few years, median incomes in America have actually fallen. In fact, since the end of the 2008 economic recession, 95% of the economic gains have gone to the richest 1% of Americans. There is also evidence that tax fairness can promote a better functioning society. While it is difficult to separate correlation from causation on this issue, tax fairness may influence people’s willingness to comply with laws. The concept of tax fairness is tightly entwined with equality and society’s perceptions of fairness. As our tax system has become easier to exploit and more regressive, our society has become more unequal. While one does not necessarily drive the other, they are highly related. To achieve a society that aligns more closely with our preferences, we should reform our tax code and eliminate offshore tax loopholes that allow corporations and wealthy individuals to substantially reduce their tax burdens.

Our new paper, “Different From You and Me: Tax Enforcement and Sophisticated Tax Evasion by the Wealthy,” reviews recent research showing that tax evasion and legally dubious forms of tax avoidance by wealthy individuals and large corporations represent an important and pressing challenge for the IRS, which needs more funding, not less, to tackle this problem. The research shows that the wealthy are adept at using sophisticated tactics to reduce their tax bills, but we argue that the IRS has tools at its disposal to combat this problem. Investing in tax enforcement targeting the high-wealth population could make taxes in the United States more progressive, raise revenues to fund vital public programs, and restore public confidence in the U.S. tax system.

Building the IRS workforce of the future will take several years as well. It takes four to five years to train new hires to become revenue officers capable of detecting fraud in complex cases.35 The IRS fell well behind the curve because of a hiring freeze in effect from 2011 through 2018 and therefore will need to bolster its ranks.36 The agency needs reliable multiyear funding to rebuild itself. “Mandatory, consistent, adequate, multiyear funding allows us to plan appropriately,” Commissioner Rettig told Congress in his testimony.37 The Biden administration’s FY 2022 appropriations request is a good start, but given that annual appropriations have consistently fallen well short of what the IRS requires, Congress this year must seize the opportunity to provide mandatory, multiyear funding to supplement annual appropriations.38

More than half of the Inflation Reduction Act’s $80 billion in new IRS funding would go toward enforcement activities rather than toward technology enhancements. Amy Pitter of the Massachusetts Society of CPAs shares why there should be a heavier focus on technology, customer service, and payment processing. No matter your politics, I think we can all agree that the IRS is underfunded, understaffed, and has ridiculously outdated technology that prevents it from doing even its most basic functions competently or effectively. While I am happy that the Inflation Reduction Act will include significant funding for the IRS, I remain frustrated by the hyper focus on enforcement activities. More than half of the $80 billion in new funding would go to those activities rather than to technology enhancements, customer service or processing of returns, payments, and other documents.

Unfortunately, simply restoring funding levels is by no means the easy fix. A federal agency deprived of funding for a year or two can tighten its belt and sustain operational efficiency. But a decade of funding cuts meant that the IRS, unable to hire new talent, missed out on almost an entire generation of skilled employees. As tens of thousands of employees resigned or retired, the agency lost a vast amount of institutional knowledge — a resource that will take time and training to restore. (Most technical IRS positions require two or more years of on-the-job instruction before an employee becomes self-sufficient.) A dedicated and consistent funding stream would enable officials to steadily ramp up their enforcement practices. This investment would also signal to potential tax evaders that they can no longer count on short staffing to keep eyes off their fraudulent returns. The additional funding for the IRS would be a long-overdue game-changer for the agency, but if it is just a temporary infusion of cash, it is likely to fail in its goals. As the adage goes, “You get what you pay for.” For too long, the American public has picked up the tab for underfunding IRS enforcement.

The U.S. tax code hasn’t been comprehensively simplified since 1986. Over the subsequent years, Congress has indulged its unlimited appetite for making it unintelligible. Back in 2010, a panel chaired by Paul Volcker reported that taxpayers and businesses spend 7.6 billion hours and “significant out-of-pocket expenses” to do their taxes each year, a cost equivalent to at least $140 billion. That was 12 times the IRS budget or 10 cents per dollar of income tax paid. What a mess. And what a shame that the new IRS budget isn’t part of a plan to fix it. In a narrow sense, the extra spending does make sense. My colleague Tyler Cowen argues that the IRS is badly run and should be told to smarten up before it gets more money — a fair point, given the agency’s failure to modernize its systems and make better use of its existing resources. But the squeeze on its budget (a cut of about a fifth in real terms since 2010) and the relentless rise in its workload (lately aggravated by the pandemic) would test any undertaking, especially one that was stressed to begin with.

One of the most conspicuous parts of the tax-and-spending package known as the Inflation Reduction Act is vastly expanded funding — an additional $80 billion over 10 years — for the Internal Revenue Service. If the IRS lacks the means to do its job well, could that be because its job is far more demanding than it ought to be? Yes: The IRS struggles to administer the system because U.S. taxes are insanely complicated. In this respect, the purportedly bold innovation on funding for the agency is partly a tribute to the status quo. The enormous increase in spending is combined with another new batch of complexities. Highlights include incentives for climate-related investments and assorted other good things, and a minimum corporate tax that requires eligible companies to calculate what they owe not one way but two, then pay the larger sum. Changes like these serve legitimate purposes, but they are partly self-defeating. With one hand you incentivize decisions that serve the public interest; with the other, you cancel them out by closing “loopholes.” On top of which, every further complication is an opportunity for tax avoidance, an added compliance burden on taxpayers and the IRS alike, and a transfer of income from producers of socially valuable goods and services to accountants and lawyers eager for their share of the resulting deadweight loss.

For decades, whenever Congress has “reformed” the tax code, it has just layered on new complications. The U.S. now has a system that might have been designed to fail, incentivize avoidance, perpetuate a colossal tax gap, and drive taxpayers and IRS officials alike out of their minds. The biggest problem with the IRS is not that it’s been badly managed (though perhaps it has been) or under-resourced (which it undoubtedly has been), but that hyperactive legislators have given it an impossible task. $80 billion won’t come close to putting that right.

Now, with some of that money clawed back, there is a question about what programs may take a back seat. Treasury officials say their plan to develop an online free file tax return system, which is in its pilot development stage, for instance, will not be impacted by the cuts. But some analysts are skeptical about the Biden administration’s assurances. Steve Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center, said “the loss of the funds has to be a setback” for the agency. “With less money and resources, everything will slow down. It just may take a while longer” to develop certain promised programs, he said. “I don’t know if this will come out of service, enforcement, technology or otherwise.”

The House just approved the deal struck by President Biden and House Speaker McCarthy to suspend the nation’s debt limit through 2025 in exchange for a range of cuts sought by Congressional Republicans. While the deal is not as draconian as the debt bill that passed the House earlier this spring, it includes no new revenues even though tax cuts of the past few decades have been the primary driver of deficit growth. And one provision of the deal – to claw back important funding to crack down on wealthy tax cheats – would actually increase the deficit while continuing the rig the system in favor of the most well-off. The deal contains a $21.4 billion cut to IRS funding for tax enforcement. This includes an immediate $1.4 billion cut, and a side deal to cut, over the next two years, a quarter of the $80 billion in new funding the IRS received last year as part of the Inflation Reduction Act. This new funding – particularly the part for tax enforcement, which is the prime target of House Republicans – is critical to allowing the IRS to do one of its most important jobs: crack down on tax cheating by the extremely wealthy and by big corporations. The IRS has had a hard time doing this lately because its enforcement budget was cut by about a fourth between 2010 and 2021. This led to 40 percent fewer revenue agents – the auditors uniquely qualified to examine the returns of high-income individuals and corporations. The number of revenue agents is the lowest it’s been since 1953. At the same time, rich business owners have exploited the IRS’ lack of resources by aggressively creating enormously complex “pass-through” business structures with hundreds or even thousands of sub-businesses, shell companies, and trust accounts. Dissecting these structures takes resources that the IRS has been denied. The number of partnerships with assets above $5 million – just one type of pass-through business structure – grew by 75 percent between 2010 and 2020. And by the end of the decade, the audit rate of these businesses was less than half a percent. As a result, the gap between taxes owed and paid keeps growing, driven largely by the inscrutable labyrinth of business entities that well-paid accountants and attorneys can create for their clients. The most recent estimated gross tax gap, for 2014 through 2016, was $496 billion. The White House says the cuts in the proposed deal shouldn’t change the agency’s plans for the next few years, since the original $80 billion was to be spent over a 10-year period. At best, however, that leaves the agency short of funds in the future. If you’ve worked around budgets for long enough you know a simple truth: a cut is a cut. And this is, indeed, a cut of significant proportions. Ironically, for Republican leaders who have spent months clamoring about the deficit, these cuts to the IRS will increase the deficit by reducing the revenue the agency is able to collect from those who owe. (Perhaps it’s less ironic and more on-brand, given that these same Republican leaders want to quickly pivot to pushing through more big tax cuts that will disproportionately reward wealthy families and corporations.) The IRS cuts will increase the deficit by $19 billion over the next decade because it will depress revenue collections by $40.4 billion, according to Congressional Budget Office estimates provided to Senate Budget Committee Chairman Sheldon Whitehouse. Could this debt deal have been worse for tax enforcement? Absolutely, given that House Republicans’ first legislative move of this Congress was to repeal a much bigger chunk of the new IRS funding. But that doesn’t change the fact that cutting these critical funds to enforce our tax laws erodes the fairness and integrity of our entire tax system while reducing the revenue lawmakers have available to invest in the American people.