Biden Preparing a $3 Trillion Spending Plan: Reports

By Yuval Rosenberg

Biden Preparing a $3 Trillion Spending Plan: Reports

President Joe Biden’s economic advisers are preparing a sweeping
$3 trillion spending plan that would focus on jobs, infrastructure
and climate change but also include a range of other policy
priorities, according to reports Monday in
The New York Times and
The Washington Post.

The advisers reportedly are set to propose splitting the plan
across two bills instead of pursuing one giant package, though the
details — including the final cost — are still in flux and it is
unclear whether Biden will sign off on that strategy.

The Times’s Jim Tankersley
reports:

“The first legislative piece under discussion, which some
Biden officials consider more appealing to Republicans, business
leaders and many moderate Senate Democrats, would combine
investments in manufacturing and advanced industries with what
would be the most aggressive spending yet by the United States to
reduce carbon emissions and combat climate change.
“It would spend heavily on infrastructure improvements, clean
energy deployment and the development of other ‘high-growth
industries of the future’ like 5G telecommunications. It includes
money for rural broadband, advanced training for millions of
workers and 1 million affordable and energy-efficient housing
units. Documents suggest it will include nearly $1 trillion in
spending alone on the construction of roads, bridges, rail lines,
ports, electric vehicle charging stations and improvements to the
electric grid and other parts of the power sector. …
“The second plan under discussion is focused on what many
progressives call the nation’s human infrastructure — students,
workers and people left on the sidelines of the job market —
according to documents and people familiar with the discussions. It
would spend heavily on education and on programs meant to increase
the participation of women in the labor force, by helping them
balance work and caregiving. It includes free community college,
universal pre-K education, a national paid leave program and
efforts to reduce child care costs.”

Questions about offsetting costs and legislative
strategy: The expected $3 trillion in proposed spending does
not include the cost of extending newly enacted temporary tax cuts
aimed at fighting poverty and reducing inequality, meaning that the
ultimate price tag could still grow by hundreds of billions of
dollars.

As is always the case when it comes to infrastructure, how to
pay for the proposed spending is sure to be a point of
contention.

Biden administration officials reportedly have considered
offsetting at least some of the infrastructure spending through tax
hikes on corporations, but any such proposal is likely to be
dismissed by Republicans. “I don’t think there’s going to be any
enthusiasm on our side for a tax increase,” Senate Minority Leader
Mitch McConnell (R-KY) said last week.

Biden and congressional Democrats may have to decide whether to
try to forge a compromise with Republicans, and potentially scale
back the corporate tax increases, or again look to use the budget
reconciliation process that enabled them to pass the $1.9 trillion
American Rescue Plan without any GOP support.

“Administration officials are considering offering to extend
some 2017 tax breaks that are set to expire, like the ability to
immediately deduct new investments, as part of their plans in order
to win over business support,” Tankersley writes.

Administration officials reportedly are also considering options
for offsetting the cost of making new tax cuts permanent through
steps that would reduce other federal spending, such as allowing
Medicare to negotiate drug prices, or by raising the top individual
income tax rate from 37% back to 39.6% — and, perhaps, by lowering
the threshold for that top rate for individuals from north of
$500,000 to $400,000.

The Congressional Budget Office estimated last year that a
Democratic bill to lower prescription drug costs could save the
government about $450 over 10 years.

Why it matters: The Biden White House is again going big,
but as the Post’s Jeff Stein and Tyler Pager write, there remains a
divide among Democrats on what the administration should do
next:

“Democrats’ left-flank is clamoring for the party to use
its rare hold on power in Washington to approve long-held policy
goals, from an expansion of health care to action on climate
change. Democrats’ centrist wing, however, has expressed repeated
unease about the party-line vote over pandemic relief, and has
pushed for a return to bipartisan policymaking. That could
complicate passage, particularly through the Senate, of any major
Biden infrastructure package.”

What the Top 1% Are Hiding From the IRS

Tax evasion among the wealthiest Americans is more substantial
than previously estimated, according to a new
paper published by the National Bureau of Economic
Research.

The analysis by a team of academic and federal researchers finds
that the top 1% of taxpayers fail to report about 21% of their
income to the IRS. This misreporting is largely by design, the
product of sophisticated strategies by wealthy households to avoid
paying taxes. For the richest 0.1%, the numbers are even more
significant, with unreported incomes nearly twice as large as
previous IRS estimates indicated.

Two key strategies to avoid taxation involve the use of offshore
accounts and pass-through businesses, both of which are
“quantitatively important” to households at the top of the income
ladder, the researchers said. Random audits by the IRS often fail
to detect income hidden within those structures, and the problem
appears only to be getting worse.

Overall, the report estimates that unpaid income tax for in the
top 1% totals at least $175 billion per year.

“There is more revenue than you might have thought at the very
top,” Daniel Reck of the London School of Economics, one of the
paper’s five authors,
told The Wall Street Journal.

A taxing proposal: One major problem for the IRS is that
the agency has no good way to verify business income. Wage earners
receive W-2 forms from their employers, which capture more than 90%
of wages paid and greatly reduce the ability to cheat, but there is
no such system for businesses. Two years ago, the IRS estimated
that more than half of all business income goes unreported, leaving
billions in profits, rent and royalties untaxed each year. Those
missing taxes form the biggest chunk of the $600 billion the IRS
says goes unpaid every year.

A potential solution to the problem is to create something like
a W-2 system for businesses. The New York Times editorial board

made the case for such an option, building on a
proposal from Charles Rossotti, who led the IRS from 1997 to 2002.
Rossotti argued that simply assigning more investigators to examine
the tax returns of the wealthy is insufficient. Instead, he
proposed that banks should send annual income statements for
businesses to the IRS, similar to the 1099 forms sent to investors
every year.

Interestingly, such a system wouldn’t change the amount anyone
owes in taxes. All it would do is create a system that makes it
harder to cheat. “It would have the immediate benefit of scaring
people into probity,” the Times said.

By way of instructive comparison, the Times noted that starting
in 1986, taxpayers for the first time were required to provide
Social Security numbers for all those being claimed as dependents.
As a result, about 7 million children disappeared from the nation’s
tax returns in just one year.

The Times also called for a big increase in funding for the IRS,
which has faced crippling budget cuts over the last decade. An
analysis published last fall by Rossotti and two co-authors, former
Treasury Secretary Lawrence Summers and University of Pennsylvania
law professor Natasha Sarin, argued that a $100 billion investment
in the tax agency over 10 years would enable the IRS to collect
$1.4 trillion in unpaid taxes over 10 years.

“The logic of such an investment is overwhelming,” the Times
said. “The government can crack down on crime, improve the equity
of taxation — and raise some needed money in the bargain. There are
many proposals to raise taxes on the rich. Let’s start by
collecting what they already owe.”

Growing interest in taxing the rich: In addition to
closing loopholes and beefing up enforcement, President Biden’s
economic team has been pushing more aggressively to raise taxes on
the wealthy, spurred by data showing that those on the upper rungs
of the economic ladder have done very well during the Covid-19
pandemic (see the chart below), Bloomberg’s Nancy Cook
reports Monday. The revenues raised by the new
taxes will be used to help those in the middle and at the bottom
who have been left behind, both during the coronavirus crisis and
over a longer period stretching back decades.

Biden has hired several advisers who have written extensively on
how to go about taxing the rich, including New York University Law
School professor David Kamin, who now serves as deputy director of
the National Economic Council. Kamin
told Bloomberg that the administration is
currently considering a number of options, including a minimum tax
for big businesses, raising the capital gains tax rate and removing
the “step-up basis” on estates that allows long-term capital gains
to go untaxed when passed onto heirs.

Passing these reforms “would be major accomplishments, which
would pretty fundamentally shift how our tax system treats the
richest Americans and the largest corporations so they can’t escape
tax in the ways they now can,” Kamin said.

A Look Ahead at the Defense Budget Under Democrats

CQ Roll Call’s Andrew Clevenger takes an
insidery look today at how the two new Democratic
chairs of the House and Senate Defense Appropriations subcommittees
— Rep. Betty McCollum of Minnesota and Sen. Jon Tester of Montana,
respectively — may affect the Pentagon’s $700 billion budget. What
you should know: Dov Zakheim, a former Pentagon comptroller in the
George W. Bush administration, tells Clevenger that early signs
point to the budget staying relatively flat next year because the
White House won’t want to start a fight over defense spending as it
tries to advance other elements of its agenda. “In those sorts of
circumstances, you’re not seeing major plus-ups for aircraft or
ships or things of that sort,” Zakheim says. “You’ll see plus-ups
for artificial intelligence, for cyber and quantum computing. But
those aren’t massive, multizillion-dollar programs.”

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