The Democrats’ Inflation Reduction Act (IRA), enacted in August 2022, is proving to be a significant driver of increased tax revenues and enhanced enforcement efforts by the Internal Revenue Service (IRS). Recent reports suggest that tax revenues are expected to rise by up to $561 billion from 2024 to 2034, thanks to stepped-up enforcement facilitated by the IRA.
The Congressional Budget Office’s initial estimate in 2022 projected a revenue increase of $180.4 billion from 2022 to 2031 due to the additional funding provided to the IRS through the IRA. However, the latest projections indicate that if IRA funding is restored, renewed, and diversified, revenues could soar to as much as $851 billion from 2024 to 2034.
Administration officials, including National Economic Adviser Lael Brainard, are using these findings to advocate for President Joe Biden’s economic agenda. Brainard emphasizes that President Biden’s investment in rebuilding the IRS will lead to a significant reduction in the deficit by ensuring that the wealthy and large corporations pay their fair share of taxes.
Despite the promising outlook for increased tax revenues, the IRS has faced challenges due to funding cuts initiated by House Republicans. These cuts, totaling $1.4 billion, were built into the debt ceiling and budget cuts package passed by Congress. Additionally, a separate agreement diverted an additional $20 billion from the IRS to other non-defense programs over the next two years.
In response, the IRS has implemented various measures to optimize its remaining funds and enhance enforcement efforts. New customer service improvements have been rolled out, and the agency announced successful efforts to recoup half a billion dollars in back taxes from wealthy tax evaders. These initiatives aim to mitigate further cuts and demonstrate the value of IRS funding.
One of the IRS’s primary challenges has been ensuring tax compliance, particularly among high-income individuals and large corporations. The audit rate for millionaires and large corporations had significantly declined in previous years. However, IRA funding has enabled the IRS to reverse this trend and address the growing tax gap, estimated to exceed $600 billion annually.
Overall, the Democrats’ Inflation Reduction Act has emerged as a crucial tool for bolstering tax revenues, enhancing IRS enforcement capabilities, and narrowing the tax gap. Continued investment in IRS funding and enforcement measures will be essential for sustaining these positive trends and ensuring tax fairness and compliance across all income levels.