The Biden administration is proposing broad investments in infrastructure and supports for American families and identifies improved tax enforcement as one way to pay for it.
Through a combination of legal maneuvers and minimal IRS enforcement of tax rules, households and corporations with ultra-wealth pay low tax rates. The IRS estimates tax evaders are shortchanging the federal government by up to $1 trillion. Increased tax compliance through greater IRS oversight of households and corporations with wealth will raise an estimated $700 billion[1] over 10 years and fund crucial investments in American jobs and families.
A recent ProPublica report[2] highlighted how many of the wealthiest people in the US use complicated tax loopholes to avoid paying federal income taxes or pay far less of their share than the average American. The analysis of leaked IRS data shows billionaires legally avoid paying taxes on the rising value of their investments including property and stock, sometimes borrowing against their assets in order to show income losses on paper while at the same time accessing millions of dollars in loans not considered income by the IRS. All of which is legal under current US tax code. Individuals and corporations with wealth also have deep pockets and skilled tax attorneys to fight against government audits. When the IRS took on Microsoft, for example, the corporation buried auditors in a slew of complex legal and lobbying tactics to ensure the process was prolonged for years.[3]
Robust resources of people with wealth and funding cuts of 20% at the IRS over the last decade result in disproportionate enforcement rates for working households with low income as compared to the most powerful families and corporations. The IRS focuses more effort on enforcement of earned income tax credit (EITC) — a tool designed to support workers and families with low- to moderate-income — than it does on audits of people with ultra-wealth[4], failing to pursue many of those with higher incomes who did not file tax returns.
To address these flawed practices, the Biden administration is proposing a crackdown that would increase enforcement for people with wealth and corporations — and is vowing to fundamentally reform how the tax code treats corporations. In its American Jobs Plan and American Families Plan, the administration pledges to provide the IRS with resources to pursue corporate audits and increase enforcement of tax avoidance.[5]
Legislation has also been introduced in Congress to address this issue. The Stop Corporations and High Earners from Avoiding Taxes and Enforce the Rules Strictly (Stop CHEATERS) Act introduced by Sen. Angus King and colleagues proposes to restore funding cuts at the IRS by dedicating $80 billion over the next 10 years to help increase audit rates for individuals with high income, corporations, and estates.[6] The legislation aims to enforce tax laws already in place and create greater penalties for tax avoidance among people with wealth.
Increased resources at the IRS could also help states boost tax compliance and revenues in their tax systems. Revenue departments of many states, including Maine, rely heavily on federal enforcement of tax laws to flag fraudulent filings of state returns.
The infrastructure investments in Biden’s plans are transformational and on a scale not seen in nearly a century.[7] For communities across the country these initiatives will plow resources that are vital to COVID-19 recovery efforts. Raising funds to support investments in recovery is critical to securing the long-term strength of the economy.
In addition to progressive changes to the tax code so that everyone contributes a fair share, closing the tax gap between what is owed and what is paid creates a system of sufficiency, sustainability, and fairness. Congress must support tax enforcement policies to help fund investments needed to rebuild our economy.
Notes:
[1] https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/
[2] https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax
[3] https://www.propublica.org/article/the-irs-decided-to-get-tough-against-microsoft-microsoft-got-tougher
[4] https://www.propublica.org/article/earned-income-tax-credit-irs-audit-working-poor
[5] https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/
[6] https://www.king.senate.gov/newsroom/press-releases/king-brown-kaine-introduce-bill-to-empower-irs-to-close-trillion-dollar-tax-gap
[7] https://www.whitehouse.gov/briefing-room/statements-releases/2021/06/24/fact-sheet-president-biden-announces-support-for-the-bipartisan-infrastructure-framework/
