President Joe Biden says that his $1.75 trillion Build Back Better reconciliation framework will pay for itself almost entirely through sweeping new tax measures.
The administration has proposed that it will raise nearly $2 trillion in revenue over the next decade through eight policies aimed at increasing taxes and closing loopholes for the wealthiest Americans and large corporations. The White House is hoping to invest another $80 billion in the Internal Revenue Service to aid in this new work.
But throwing money at the already overburdened IRS might not be enough to offset a significant lack of auditors and resources that has led to an agency unable to collect 15% of taxes owed, with falling audit rates across the board.
A recent report from the U.S. Department of the Treasury found that more than a quarter of unpaid taxes come from the top 1% of earners and more than 20% come from the top 0.5%.
“Regular workers pay the taxes they owe on their wages and salaries—with a 99% compliance rate—while too many wealthy taxpayers hide their income from the IRS so they don’t have to pay,” the White House said in a fact sheet accompanying the framework rollout. “Yet the IRS does not have the resources it needs to pursue wealthy tax cheats.”
In the past decade, the IRS has lost about 17,000 enforcement workers, largely from highly specialized areas that focus on the wealthy and corporations. During the pandemic, the agency experienced a phone-answering rate of just 7%.
While Biden’s proposed investment in the IRS is historic, experts worry that it won’t be enough to quickly fix an agency riddled with inefficiency that has experienced 10 years of significant cuts.
The Congressional Budget Office predicted that the boost would bring in just $200 billion in revenue, claiming that wealthy taxpayers will find new ways to evade their tax bills and that outdated technology at the IRS will make an increase in productivity nearly impossible. The average audit still takes about 30 months to complete, warned the CBO, and the turnover rate at the IRS is higher than the White House is estimating. The Biden administration, hoping to hire and train specialists, may have trouble finding “its desired mix of candidates,” the report said.
Still, Deputy Secretary of the Treasury Wally Adeyemo, remains confident that the agency will be able to lower the $7 trillion tax gap and collect new revenue efficiently.
“The challenge has always been those individuals have the ability to hire teams of lawyers and to slow down the process. And frankly, we’ve underinvested in the IRS so they haven’t had the same teams of lawyers on their side,” he told Fortune. “What Congress is doing here is they’re making a historical investment in the IRS that will put them in a better position to go after those individuals and to review their documents and to make sure that we’re getting a better return on our investment. We’re putting an end to the process where it’s easier to go after people who are the least likely to have money to pay in the system.”
The Treasury Department, said Adeyemo, is working closely with the IRS and taking on additional responsibilities to prepare to implement systems that will help distribute new benefits and “track down those people who haven’t been paying their taxes.”
Biden’s new Build Back Better framework was created through consultation and negotiations with Senate and House Democrats but is not the final bill; the legislative bodies will still need to write and pass the reconciliation agenda before the Dec. 3 deadline. That means that pieces of the plan could shift. One likely part that might change involves a requirement that banks report transaction amounts to the IRS—information that the agency calls key to closing the tax gap and effectively billing wealthy Americans.
To “ensure that everyone pays their fair share,” wrote Natasha Sarin, deputy assistant secretary for economic policy at the Treasury, in a report, auditors need to be able to access “information that financial institutions already possess—without imposing any burden on taxpayers whatsoever—so the IRS can deploy these additional resources to audit more sophisticated tax evaders. These changes to the third-party information reports are estimated to generate $460 billion over a decade.”
At least 21 House Democrats urged Speaker Nancy Pelosi in a letter to remove that provision from the final reconciliation bill. “While the intent of this proposal is to ensure all taxpayers meet their obligations—a goal we strongly share—the data that would be turned over to the IRS is overly broad and raises significant privacy concerns,” they wrote.
“There’s always going to be a compromise when we try and pull together a final bill,” said Adeyemo. “But when you look at that compromise, the president’s philosophy on taxation is reflected, taxes on people making under $400,000 don’t go up, and the wealthiest Americans, the people who can afford to pay the most, will see their taxes increase.” Some of the proposals may be different, or may change, he said, but what matters is that ultimately and directionally, investments are being made for the middle class and are being paid for by the wealthy. That shift, no matter how large it ends up being, he emphasized, is the most important aspect of the plan.
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