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.”
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.”