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.
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.”
It claims to provide an insight into how prominent billionaires such as Jeff Bezos, Elon Musk, and Michael Bloomberg take advantage of “tax avoidance strategies” beyond the reach of ordinary people.
Though there is general public consensus on the illegality of tax evasion – the act of deliberately not paying taxes that are due – much more variance exists in how the public evaluates and scrutinizes tax avoidance strategies that seek to minimize the amount an individual pays through legal loopholes. There is no suggestion that the billionaires in the ProPublica report did anything illegal.
A poll taken just before the 2016 election found that nearly half of Americans agreed with Donald Trump – another wealthy individual not averse to tax avoidance strategies – who noted that paying minimal or no taxes is “smart.” But two-thirds said it is “selfish” and 61% declared it to be “unpatriotic.”
As a scholar who studies business ethics, I see these differences in how individuals view and rationalize tax avoidance as being dependent on a person’s ethical foundations. Ethical foundations are the principles, norms, and values that guide individual or group beliefs and behaviors. They can shape what people believe is important – such as fairness, care for oneself or others, loyalty, and liberty – and guide judgments about what is right, or ethical, and what is wrong, or unethical.
Philosophers have debated these ethical foundations for centuries, coming up broadly with three different perspectives that are worth exploring in the context of tax avoidance strategies.
Thinkers from Immanuel Kant to John Rawls have offered what has been called the deontological argument. This emphasizes ethics based on adherence to rules, regulations, laws, and norms. Such an approach suggests that “what is right” is defined as that which is most in line with an individual’s responsibility and duty toward society.
Meanwhile, utilitarian philosophers such as John Stuart Mill and Jeremy Bentham put forward an argument that recognizes the costs and benefits, or even trade-offs, in pursuing what is right. Under this belief system, called consequentialism, behaviors are ethical if the outcome is beneficial to the greatest number of people, even if it comes at a cost.
A third perspective comes in the shape of what is called the virtue ethical foundation that is associated with Aristotle and other Greek philosophers. This suggests that what is right is that which elevates the individual’s virtues and efforts toward moral excellence – defined by both avoiding vices and striving to do good. In this way, ethical behavior is that which enables the individual to achieve his or her most excellent moral self.
On morals and money
When applied to the tax avoidance strategies of individuals, each perspective offers a unique understanding of why individuals differ on what they view to be “right.”
An individual who adopts the deontological perspective likely evaluates a public figure’s tax avoidance strategies – and that of others – with less scrutiny. As long as an individual follows the tax code, and acts legally, the tax avoidance strategies are likely to be viewed by that individual as ethical.
In contrast, a consequentialist is likely to evaluate tax avoidance strategies by also looking at how those taxes could have been used to benefit society – by paying for schools and hospitals, for example. When one individual – be it a billionaire or any other person – avoids taxes, it increases the costs experienced by everyone else while also decreasing the benefits experienced by society as a whole.
The cost to society in terms of lesser funding for programs and services supported by tax dollars may be even greater when a wealthy individual avoids taxes, given what is likely a higher tax responsibility than that of individuals with modest incomes. Thus, consequentialist individuals may well conclude that tax avoidance strategies are unethical.
An individual who adopts the virtue perspective of Aristotle might evaluate tax avoidance strategies in the context of an individual’s other virtuous behaviors. If someone avoids taxes but provides financial support to other institutions or entities that are meaningful to the tax avoider but also produce benefits for society, then the virtuous individual may view this behavior with less disdain.
For example, someone may use tax avoidance strategies and direct some wealth to provide funding directly to an academic health care center for cancer research. But if that person employs tax avoidance strategies in the absence of any other virtuous behaviors, then the tax avoidance is likely to be seen and rationalized as unethical.
So whether tax avoidance strategies are viewed and rationalized as ethical or unethical likely depends on the ethical foundations of the person judging such actions.
But when it comes to public figures and the superrich, there are additional ethical concerns at play here. Public figures are evaluated not just on their own personal morality, but also by what influence their behaviors could have on others. If the superrich avoid taxes, it might signal to the public to do the same, which could have greater consequences. The public often demands more of the superrich – and ethics are no exception. The expectation is that these individuals, as leaders in society, should create benefits for society through their behaviors. As a result, these individuals may be held to a higher ethical standard and their behaviors more closely scrutinized.
As such, the question of whether the tax avoidance strategies of the ultrawealthy are “ethical” depends not only on the ethical foundation of the individual who views and judges the behavior but also on the expectation of the ultrawealthy to create benefits for society.
On Tuesday morning, ProPublica published a bombshell report showing how little America’s wealthiest pay in taxes, based on leaked documents from the Internal Revenue Service (IRS).
The report shows in detail how billionaires like Jeff Bezos and Warren Buffett have seen billions added to their net worth with little impact on their tax bill. It’s totally legal, and for many, not all that surprising.
“It’s not surprising at all, I think,” Chuck Collins, who works at the left-leaning Institute for Policy Studies, an organization dedicated to highlighting wealth inequality, told Insider.
Collins recently wrote a book on the ways the ultrawealthy hide their money and avoid taxation. In it, he uses the term “wealth defense industry” for the cottage industry that’s grown around helping the rich hold onto their money.
“It’s going to be very hard for ordinary people to decipher these tax transactions because they’re purposefully complex,” Collins said. “The wealth defense industry, their bread and butter is complexity, and opaqueness.”
Chuck Marr, the director of federal tax policy at the liberal-leaning Center on Budget and Progressive Priorities, said “we’ve been making this case for a long time.” He pointed to a paper from 2019 that outlines many findings similar to those in Tuesday’s report.
Still, it’s one thing to know something is likely happening, and another to see the details laid bare, and the figures involved. For example, ProPublica found that Warren Buffett paid 0.1% in “true tax rate,” which compares how much he paid each year in taxes to how much his wealth grew.
ProPublica’s report could draw widespread attention – and scrutiny – to certain intricacies of the tax code just as President Joe Biden moves to reform taxes to pay for his infrastructure proposals.
Already, Democratic lawmakers are seizing on the public report as a way to kickstart tax reform.
The report “should make it very hard for the Congress to not address it,” Marr said. “I think it really underscores, again, that very wealthy people do not pay tax on much of their income. And so this tax bill is a clear opening to address that.”
America’s wealthiest make most of their money from assets, not income
As the 2019 CBPP paper lays out, a good amount of the income that the wealthiest bring in isn’t technically income – or at least it’s not taxed that way.
If you work a job where you receive wages in a paycheck, you’re probably familiar with the income tax, which taxes the money you get for going to work. Those wages would be income, and you’d be taxed under the income tax.
But, as both the CBPP and ProPublica note, the wealthiest Americans get most of their wealth from assets like stocks, and therefore pay taxes on capital gains.
As Marr and coauthors Samantha Jacoby and Kathleen Bryant write, capital-gains taxes are “effectively voluntary to a substantial extent: High-wealth filers may accumulate capital gains every year as their investments appreciate, but they don’t owe tax on those gains until – or unless – they ‘realize’ the gain, usually by selling the appreciated asset.”
So if you hold onto your stock assets, you’re not seeing that capital gains rate. Goldman Sachs estimated last month that the wealthiest Americans possessed between $1 trillion to $1.5 trillion in unrealized capital gains at that time. Some argue that those unrealized gains should be taxed, since the wealthiest could be sitting on valuable stocks, making money, and not paying taxes. Meanwhile, researchers at the right-leaning Tax Foundation argue that a progressive consumption tax would be a better way to tax the rich.
ProPublica reported that the ultrawealthy can also borrow hefty sums of money to pay off their bills as they sit on stocks and take in little income. “They’ll borrow money and they’ll use the stock as collateral,” Marr said. That means the wealthy are essentially using these loans as a form of income, but aren’t taxed as such.
As Marr, Jacoby, and Bryant write, “this is often a much cheaper strategy than selling stock and paying capital gains taxes, particularly when interest rates are low.”
The report could add flame to the fire for tax reform
Even before the ProPublica report, tax debate had been brewing. In particular, a provision called the “step-up basis” had been facing scrutiny.
Let’s say you’ve held onto stock for your whole life, and it’s only grown in value. If you die and leave it to someone else, the stock takes on the value at which the recipient gets it, meaning neither the original owner nor the inheritor are taxed on those gains.
For very wealthy people, Marr said, that “wipes out a lifetime of tax liability.”
Biden wants to do away with the step-up basis and he wants to tax capital gains for those making over $1 million at a rate equivalent to income.
“Broadly speaking, we know that there is more to be done to ensure that corporations, individuals who are at the highest income are paying more of their fair share,” White House Press Secretary Jen Psaki told The Washington Post in response to the ProPublica report. “Hence, it’s in the president’s proposals. His budget and part of how he’s proposing to pay for his ideas will go ahead.”
“The principle here is to equalize the treatment of ordinary income and capital gains, and that is a principle that’s neither new or particularly novel,” Brian Deese, the director of the National Economic Council, said in an April briefing. “In fact, the last president to enact a reform to equalize the treatment of ordinary income and capital gains was President Reagan, who did so while raising capital-gains taxes as part of the 1986 tax reform.”
The White House did not respond to Insider’s request for comment.
There’s been GOP resistance to further alterations to the tax code following their 2017 tax cut, especially any increase in rates. But the new reporting already ramped up the tax debate within Congress on Tuesday.
Sen. Bernie Sanders, who chairs the Senate Budget Committee, told reporters on Capitol Hill, “To the surprise of nobody I know, the rich and powerful aren’t paying their fair share, what else is new?” He urged lawmakers to approve Biden’s tax proposals.
“I do want people to understand the bottom line,” Sen. Ron Wyden, chair of the Senate Finance Committee, told reporters. “What ProPublica is revealing is, again, some of the country’s wealthiest taxpayers [that] profited handsomely during the pandemic are not paying their fair share.”
He said he’s in the process of crafting a proposal to change that. Asked by Insider about the timeline of its introduction, Wyden responded: “I’ll have it ready to go shortly.”
“Often solutions to this are portrayed as radical, but what’s radical is the current situation,” Marr said. “What’s radical is that wealthy people, a lot of their income never gets taxed. That’s radical.”
Cybersecurity mogul and former presidential candidate John McAfee is facing a variety of charges brought by the US Department of Justice, according to a newly unsealed indictment.
McAfee is being charged on a range of offenses, “stemming from two schemes relating to the fraudulent promotion to investors of cryptocurrencies qualifying under federal law as commodities or securities,” the DOJ statement published Friday said.
More specifically, McAfee and a colleague “allegedly raked in more than $13 million from investors,” Manhattan US Attorney Audrey Strauss said, through a variety of means related to cryptocurrency: A so-called “pump and dump” scheme, the indictment said, and undisclosed agreements to promote certain currencies for compensation.
“The defendants allegedly used McAfee’s Twitter account to publish messages to hundreds of thousands of his Twitter followers touting various cryptocurrencies through false and misleading statements to conceal their true, self-interested motives,” Strauss said.
If found guilty, McAfee faces a potential maximum prison sentence that would amount to a life sentence.
McAfee has over 1 million Twitter followers, and remains active on the social media platform – even though he’s currently imprisoned in Spain due to the prior tax evasion charges. In his profile, McAfee described himself as an, “Iconoclast,” and a, “Lover of women, adventure and mystery.”
McAfee didn’t respond to a request for comment as of publishing.
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