Government

House Republicans Seek To Defund The IRS And Replace The Income Tax With A National Sales Tax

The House Republican proposals to weaken the IRS is opposed by Democrats, half of the country, and most tax professionals.

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After days of drama, negotiations, and multiple rounds of voting, Republican Representative Kevin McCarthy finally became Speaker of the House. The first item on his agenda was to weaken the IRS.

House Republicans passed a bill that would repeal IRS funding increases from the recently passed Inflation Reduction Act (IRA). They will also vote on a bill that would dismantle the IRS, repeal all income taxes, and replace them with a national sales tax.

Both bills are opposed by the Democrat-controlled Senate and the White House, so it is certain that they will not become law.

The IRA would provide an additional $80 billion dollars to the IRS to address several consistent complaints about the agency. Its infrastructure would be modernized and upgraded to improve the agency’s functionality. More customer service agents would be hired to speed up service and reduce the chances of long hold times. But it could take years before the effects can be seen as new hires would need extensive training before being able to effectively assist taxpayers.

Lastly, a portion of the funding would be used to hire enforcement personnel. This includes auditors, collection agents, investigators, attorneys, and special agents for criminal investigations. Democrats claim that this is necessary to ensure that the wealthy pay their fair share and reduce the tax gap. But Republicans believe that the funds will be used to hire 87,000 new agents who would harass small businesses.

Repealing IRS funding is expected to increase the deficit by $114 billion according to the Congressional Budget Office.

Most tax professionals support funding the IRS as it would resolve tax disputes faster and allow faster processing of tax returns which currently has a huge backlog due to the COVID-19 pandemic.

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Replacing the income tax with a national sales tax would be an enormous undertaking to say the least. It would take years before the government could fully implement such a system and for taxpayers to adjust.

A national sales tax can simplify tax compliance as people would no longer have to file income tax returns and pay additional taxes on April 15. The burden will be on businesses to collect the sales tax and file sales tax returns. Since most states already have sales tax laws, it is safe to assume that most businesses can easily adjust to collect and remit the additional federal sales tax.

However, there are challenges to a sales tax. Considering that more people are starting side hustles along with the gig economy, these people will have collect sales taxes as well. This will place a burden on those who are least likely to understand and comply with the sales tax laws. Enforcement agents will also need to be hired to investigate and monitor cash-only businesses where sales taxes can be difficult to calculate.

Finally, as a policy matter, sales taxes tend to be flat taxes, which some believe are regressive and will place a greater financial burden on low-income people.

It is also uncertain whether sales taxes will provide enough revenue to replace the income tax without creating a massive deficit.

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As mentioned, the Republican bills have no shot of passing, so what is the point? It gives a glimpse as to what Republicans are likely to do if they are in power. But this is coming from the House, and a Republican Senate and president might not necessarily agree.

Also, a losing bill can be as bold or implausible as it wants since it will not become law. This is generally done to get news attention or for political stunts.

In the final analysis, the House Republican proposals to weaken the IRS is opposed by Democrats, half of the country, and most tax professionals. It will create a bigger deficit while it is uncertain as to whether it will truly simplify tax compliance and raise enough revenue. If they want to propose a tax reform bill that is more palatable, perhaps they should start by spending some time talking to IRS employees who know the system and its faults firsthand.

That is, if they can get a hold of them.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at stevenchungatl@gmail.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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