A bipartisan Senate group wants to fund an IRS crackdown on ‘tax cheats’ in nascent infrastructure proposal

Angus King
Sen. Angus King (I-ME).

  • Senators on both sides of the aisle agree that the IRS should be funded in new spending.
  • Sen. Angus King told Insider “there’s a lot of money we’re leaving on the table” and he understands “going after tax cheats” is part of a deal.
  • Sen. Rob Portman, a prominent GOP lawmaker, said a $40 billion investment would go a long way.
  • See more stories on Insider’s business page.

As bipartisan infrastructure talks plod on, funneling money to beef up IRS enforcement looks like it’ll be sticking around.

Sen. Angus King, an independent of Maine who caucuses with the Democrats, told Insider on Tuesday that deciding what pay-fors make it into the final package is difficult – but suggested that funding for IRS enforcement will remain.

“I understand going after tax cheats is part of it,” King said. “There’s a lot of money we’re leaving on the table right now.”

The bipartisan Senate group of 10 – evenly divided between Republicans and Democrats – is working on a $1 trillion package. Sen. Rob Portman of Ohio, a prominent lawmaker in the group, told reporters Tuesday that money to bulk up the IRS’s ability to enforce tax laws would be included in the nascent framework.

The IRS officially estimates the “tax gap” coming in at $441 billion a year. But Charles Rettig, the agency’s commissioner, told Congress in April that the number could actually be over $1 trillion.

This gap between taxes owed and taxes paid could only grow if left without intervention, according to the Treasury Department, which estimates that President Joe Biden’s proposed $80 billion investment in the IRS could bring in an additional $700 billion over 10 years. That would still leave hundreds of billions in taxes going uncollected each year, Insider’s Ayelet Sheffey reports.

The bipartisan approach to IRS enforcement might not go that high.

“We have a CBO estimate that, if you put about $40 billion into bringing back the IRS workforce … that could result in $110 billion – which nets out to $63 billion,” Portman said on Tuesday. “It’s a relatively modest increase in IRS spending compared to what the Democrats proposed under Biden’s plan.”

The number of agents devoted to working on sophisticated tax evasion enforcement has fallen by 35% over the last decade, according to Treasury and the IRS budget has fallen by 20%, while audits fell by 42% from 2010 to 2017. According to a White House fact sheet, the audit rate for those making over $1 million a year declined by 80% from 2011 to 2018.

Biden wants to ramp up enforcement on the wealthiest Americans. A recent study from IRS researchers and academics found the top 1% of Americans fail to report about a quarter of their income. Income underreporting is nearly twice as high for the top 0.1%, which could account for billions unreported.

The role of IRS enforcement is coming into greater relief following a bombshell ProPublica report, which revealed just how little in proportional taxes some American billionaires pay. The tax mechanisms that those billionaires utilize are actually completely legal, but they’ve kickstarted talks of tax reform among Democrats.

Following the ProPublica report, five former treasury secretaries published an op-ed in The New York Times saying that, “in the ways outlined by President Biden’s recent proposal,” more enforcement could be pursued.

The five former treasury secretaries – who served under both Democratic and Republican presidents – write: “But on this issue, all should agree, including members of Congress of both parties: Giving the I.R.S. the tools it needs to improve compliance will raise significant revenue and create a fairer, more efficient system of tax administration.”

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Under Biden’s plan, the top 1% of Americans would pay an extra $100,000 in taxes every year

biden amtrak
President Joe Biden and First Lady Jill Biden.

  • Biden wants to increase taxes on the highest-earning Americans to offset his spending plans.
  • His proposed increases would basically only impact the top of 1% of Americans, according to a report.
  • Biden’s tax proposals aren’t final, and his proposed capital gains increase may not go up that much.
  • See more stories on Insider’s business page.

Under President Joe Biden’s proposed tax increases, the top 1% of Americans could soon see their tax bills grow by about $100,000 per year.

A new report from the Institute on Taxation and Economic Policy (ITEP) finds that only the highest-earning Americans would see their taxes change if President Biden’s proposed increases to the income tax rate and capital gains rate pass. That change is concentrated amongst the top 1%, defined as those with an income over $681,600 (their average income is $2,167,700). The bottom 99% of taxpayers would see a 0% tax change, it said.

On average, the highest earners would see an increase of $104,130 in taxes, coming in at around 4.8% of their income. For those making between $276,200 to $681,600 – an average income of $404,100 – the average tax increase would be $20 a year.

Some states will be hit harder than others by tax increases

In a few states, a larger share of the population would feel the impact of proposed tax hikes. The report highlights that in five states – and the District of Columbia – a more than 1% share of the population would feel a hit.

Those are New Jersey, Massachusetts, Connecticut, California, and New York. In Massachusetts and New Jersey, 1.2% of the population would be affected by tax hikes. The wealthiest New York City residents will soon have the highest tax rate in the country regardless, per Insider’s Hillary Hoffower.

Biden’s proposals target the wealthy, but they’re not final

Biden’s latest tax proposals explicitly target the highest-earning Americans to offset the costs of multibillion-dollar investments in childcare, education, and paid leave. He’s also proposed raising the corporate tax rate from 21% to 28% to offset investments in infrastructure like roads and bridges.

Beyond increases, the IRS could also get about $80 billion in funding to ramp up enforcement on the wealthiest taxpayers, as Biden is proposing. A recent study by IRS researchers and academics found that the top 1% of Americans may be hiding billions from the IRS; Biden’s increased IRS funding could raise $700 billion over a decade, which would still leave the wealthy hiding hundreds of billions.

Of course, the package still has a long way to go before becoming law. A Morgan Stanley research note looked at Biden’s proposals versus what they predict as possible, and said the corporate tax rate and rate on capital gains will ultimately come in lower. However, the income tax rate increase and IRS enforcement will likely be as Biden proposes.

“Look, I’m not out to punish anyone. But I will not add to the tax burden of the middle class of this country,” Biden said in a Wednesday speech to the joint session of Congress.

He added: “When you hear someone say that they don’t want to raise taxes on the wealthiest 1% and on corporate America – ask them: whose taxes are you going to raise instead, and whose are you going to cut?”

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