How Broken Is the IRS?

By Michael Rainey

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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