Biden Chases $80 Billion so the IRS Can Crack Down on Tax Evasion by the Wealthy
President Biden asked Congress for $80 billion for the IRS over the next ten years. He intends the money to be used for enforcement; with these extra funds, the IRS could be expected to find an additional $700 billion in tax revenue lost over the past decade.
This is a practical means of adding to the government’s coffers without changing the global tax rate or making proposals about a wealth tax. However, part of the plan includes raising the income tax rate for wealthy Americans from 37 percent to 39.6 percent and increasing capital gains tax for those making more than $1 million annually from 20 percent to 39.6 percent. There would also be an increased tax rate on income of more than $1 million annually from stock dividends.
The corporate tax rate would be increased to 28 percent from 21 percent. The corporate rate was 35 percent before Trump took over the White House. This move alone could raise more than $2 trillion over the next 15 years.
Biden’s proposal isn’t only to give the IRS more money. There would also be additional authority granted. That authority would include new disclosure requirements for wealthy people who might be hiding income and for people who own businesses that are not corporations, such as real estate partnerships and law firms.
If the proposal is successful, people who earn more than $400,000 each year will be more likely to be audited, regardless of how much income they report. In the past several years, the likelihood that the top one percent of earners would be audited has diminished because they’re more likely than low-or middle-income people to earn money from non-wage sources, like businesses and capital gains. Research indicates that nearly all wage income is reported correctly, but capital and business income are much more likely to be underreported.
Chye-Ching Huang, the executive director of the Tax Law Center at NYU Law, said, “The plan is good news for honest filers and businesses, the budget, and the rule of law. Stopping tax cheats from having an unfair advantage helps honest businesses to compete and thrive.”
Since they took over the House of Representatives in 1995, Republicans have been taking every opportunity to reduce the power of the IRS. Between 2010 and 2018, the IRS’s funding was cut by 20%. More than one-fifth of IRS staff was cut. In contrast, and not surprisingly, Democrats have spent years trying to get more IRS funding.
A report published by the House Committee on the Budget last year said, “The amount of funding and staff allocated to tax enforcement activities has declined by 30 percent. Consequently, between 2010 and 2018, the share of individual income tax returns the IRS examined plummeted by 46 percent, and the share of corporate income tax returns it examined dropped by 37 percent.”
Those who support the increase in IRS enforcement tout the agency’s success at recovering funds even with its limited resources. In October, the IRS helped catch Robert T. Brockman, a Houston technology executive, in what prosecutors called the largest tax evasion case in American history. Brockman was accused of hiding $2 billion in income for over 20 years using a web of foreign bank accounts and secret entities.
Another catch was Michael Todd Lucas, a California executive in control of several software development businesses. Although Lucas was collecting employment taxes from his workers, he failed to pay nearly $5 million in payroll taxes, interest and penalties.
Because the IRS has been unable to enforce the tax laws that already exist, the “tax gap” exists. That’s the difference between what taxpayers owe and what they actually pay. Included in gap calculations are underreported income and tax evasion.
The IRS’s most recent figures, from tax years 2011-13, show a tax gap of about $381 billion per year. Charles Rettig, the IRS’s leader, advised the Senate Finance Committee in April that he anticipates the tax gap will rise because of new sources of income, citing cryptocurrencies as an example. “It would not be outlandish that the actual tax gap could approach, and possibly exceed, $1 trillion” each year, he said.
Though Biden’s proposal would uncover $700 billion over ten years (not in the same league as $1 trillion each year), the National Bureau of Economic Research published a paper last year that indicates the government’s “multiplier” is a good approximation. For every $1 given to the IRS, the government’s return could be $10.
The conservative $700 billion suggested could pay for a third of the President’s $2.3 trillion infrastructure bill. He intends to use the money to pay for his “American Families Plan,” which will cost at least $1.5 trillion. The plan includes universal kindergarten and pre-K, free community college, a federal paid family and medical leave program, efforts toward more affordable child care, and tax credits to combat poverty.
Natasha Sarin, a member of Biden’s economic team, together with economist Lawrence H. Summers, has developed research suggesting that recovering $1.1 trillion over a decade with increased tax enforcement would be possible.
Of Biden’s plan, Summers said, “This is the broadly right approach. Deterioration in IRS enforcement effort and information gathering is scandalous. The Biden plan would make the American tax system fairer, more efficient and, I’m confident, raise more revenue than official scorekeepers now forecast — likely a trillion over 10 years.”
Biden’s plan would include suggestions from Sarin’s and Summers’ research, like IT improvements to help the IRS better target its audits to companies and high earners.
Another part of the plan includes a funding stream to the IRS. This steady stream of income would allow the IRS to ramp up enforcement practices without fear of budget cuts. It could also be a deterrent to tax evaders, something of a warning that the IRS’s efforts will be ongoing.
Another element of the plan is a set of new requirements for pass-through corporations and those who keep their wealth in “opaque structures.”
Fred T. Goldberg Jr., a GHW Bush-era IRS commissioner, called Biden’s plan “transformative” because of the combined factors it contains. “Information reporting, coupled with restoring enforcement efforts, is key to improving compliance. Audits alone will never do the trick.” He added “None of this happens overnight. A decade of stable funding is necessary to recruit and train talent and build on the necessary technology — not only for compliance purposes but to meet the quality of services that the vast majority compliant taxpayers expect and deserve.”
