How Broken Is the IRS?

Tuesday, April 20, 2021

Biden’s Next Major Spending Proposal Taking Shape

The White House is expected to release its next major spending proposal, called the American Families Plan, before President Joe Biden’s address to Congress on April 28.

Following up on Biden’s $2.3 trillion infrastructure proposal, the second phase of Biden’s Build Back Better program is expected to contain upwards of $1 trillion in spending and $500 billion in tax credits, much of it targeting social needs such as education, child care and paid family leave, according to The Washington Post’s Jeff Stein and Tyler Pager.

Stein said Tuesday that the spending could break down roughly like this:

$400 billion to extend the expanded child credit through 2025,
$225 billion for child care,
$225 billion for paid family leave,
$200 billion for universal pre-K,
$200 billion to $300 billion for education, including free community college.

Funding for the proposal is expected to come from tax increases on wealthy households and investors. Biden may also cite stricter enforcement of the tax code by the IRS as another source of funding.

The bottom line: The second phase of Biden’s proposed spending on public goods focuses on social capital, adding an additional – and for some, a controversial – dimension to his plan to invest heavily in American infrastructure. Passing the second phase won’t be any easier than the first, though, and could prove to be more difficult, given Republican opposition to most of the spending in the plan. Expect to see elements of both proposals in play in the coming weeks as lawmakers try to work out a deal.

How Hard Would It Be to Fix the IRS?

President Biden is counting on a reinvigorated IRS to help fund some of his more ambitious spending plans, but The Wall Street Journal’s Richard Rubin says Tuesday that revitalizing the agency may be more challenging than some policymakers expect.

There’s little doubt that the IRS needs help. The agency has lost about 15% of its workforce over the last decade, making it harder to provide services to taxpayers, and the percentage of taxpayers being audited recently fell to a 40-year low. As a result, the value of missed tax collections has soared, and Commissioner Charles Rettig said last week that the underpayment of taxes may come to $1 trillion each year.

Lawmakers have eased a long-term decline in funding recently, providing a modest boost to the agency in the past few years. But Rubin says that additional funding may not be enough.

“A turnaround takes more than money,” Rubin writes. “It is a management challenge as complex as the IRS itself. The agency is a collections company, police force, law firm, financial institution, call center and high-security information-technology shop rolled into one. It operates with political constraints no private company faces, such as budgets that fluctuate with election results and pushback from influential businesses large and small when it ramps up enforcement.”

IRS advocates say that the key to restoring the agency is straightforward: it needs a lot more well-trained people, especially those who can investigate complex partnerships and elaborate tax avoidance schemes. But it takes time to develop those skills.

“If we get funding—let’s say tomorrow or next year—for a lot of revenue agents that would be fantastic,” Deputy Commissioner Sunita Lough told Rubin, “but the results take a long time.”

Former IRS commissioner Charles Rossotti said he would wait to see how the revival effort plays out. “If I hadn’t lived in Washington for 50 years, I would say, ‘Wow, this is the moment, definitely,’” he told Rubin. However, given his experience, “I’m a little more cautious,” he said.

Chart of the Day: Getting SALTy

A group of lawmakers led by New York-area Democrats has vowed to hold up President Biden’s infrastructure plan unless it includes a repeal of the cap on the state and local tax deduction. Imposed by the 2017 GOP tax bill, the cap hits residents of high-cost, high-tax communities particularly hard, and representatives from those areas are making it a priority to restore the deductions that can be worth thousands of dollars per household.

The problem is that the SALT cap is pretty popular with policymakers from both sides of the aisle. Republicans like it because it seems to target Democratic areas, making it more expensive to follow the high-tax, good-service model of providing public goods. Some liberals, on the other hand, like the cap because it’s progressive, forcing high-income households to pay more in federal income taxes. And eliminating the cap would be regressive, with most of the benefits flowing to those high-income households.

This chart from the Institute on Taxation and Economic Policy shows just how regressive the elimination of the SALT cap would be: In the four states whose representatives dominate the anti-SALT cap caucus in Congress, “more than half the benefit of SALT cap repeal would flow to white households with annual incomes above $200,000. This is a group that accounts for less than 1 in 10 households in each of these states.”

Quote of the Day

“Ever since I’ve been in office, we’ve been robbing Peter to pay Paul. This is the first time we won’t have to do that. We’ll be able to make some investments.”

-- Tishaura Jones, Democratic mayor of St. Louis, telling The Washington Post about her plans for the $500 million in aid the city will receive from the federal government as part of the $1.9 trillion American Rescue Plan. State and local governments are slated to receive $350 billion as a result of the legislation, with about a third of that headed to the local level.

Signs of Progress on Global Minimum Tax

The Biden administration has proposed a global minimum tax rate of 21% for multinational corporations but needs other counties to agree in order to make the system work. On Monday, Hans Vijlbrief, a deputy finance minister in the Netherlands, told Bloomberg that he was optimistic that an agreement can be made, potentially marking a significant turning point in the battle against corporate tax evasion.

“When the Americans initiate such a proposal and get backing from big countries like Germany and France, it would be surprising if a deal isn’t reached,” Vijlbrief said. “Tax competition is becoming something of the past.”

The deputy minister’s comments are particularly noteworthy because of the role the Netherlands plays in the global tax avoidance system. According to the Tax Justice Network, the Netherlands is the fourth largest tax haven in the world, behind only the British Virgin Islands, the Cayman Islands and Bermuda, and figures prominently in tax schemes deployed by some of the largest multinationals.

Vijlbrief said a deal could be reached by July, though many of the details need to be worked out. However long it takes, though, the interest in fostering tax evasion seems to be waning. “If you ask me, this is not the business climate you want to pursue,” Vijlbrief said. “It damages the tax climate and political morals in a country. If you want people to pay their taxes, big companies must do so too.”

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How Broken Is the IRS?