Biden Takes a Whack at Tax Perks Used by the Rich
President Joe Biden is expected to lay out his “American Families Plan” ahead of an address to Congress Wednesday, offering a package of roughly $1.5 trillion in spending that includes child-care subsidies, universal pre-K, paid and sick leave programs and free college for millions of American families. Biden is also expected to propose a variety of ways to pay for the plan, including higher tax rates on high-income households, a major change in the rules governing capital gains and a big increase in funding for the IRS.
The biggest source of new revenues in the plan comes from a revitalized IRS, according to Jim Tankersley and Alan Rappeport of The New York Times. Although plans are not yet final, Biden is expected to propose an increase in funding for the tax agency of $8 billion per year over the next decade, for a total of $80 billion. The proposed funding — which would increase the IRS budget by about two-thirds relative to the previous decade — would be used to crack down on tax evasion, with a particular focus on the rich. The effort is projected to raise at least $780 billion over 10 years, producing a net gain of about $700 billion.
“If approved, the coming White House proposal would represent a remarkable change to the IRS, which has been beset for more than a decade by problems from steep budget cuts and a growing list of responsibilities,” writes Jeff Stein of The Washington Post. There are now about as many auditors at the IRS as there were in the 1950s, Stein reports, and the agency has lost about 18,000 jobs in the last decade.
Plenty of supporters: Many tax experts welcome the proposal, according to Tankersley and Rappeport. “The plan is good news for honest filers and businesses, the budget, and the rule of law,” Chye-Ching Huang of the Tax Law Center at N.Y.U. Law told the Times. “Stopping tax cheats from having an unfair advantage helps honest businesses to compete and thrive.”
Former Treasury Secretary Lawrence Summers, who has written about the potential benefits of strengthening tax enforcement, told the Times that the Biden approach could raise a lot more than $700 billion.
“This is the broadly right approach,” Summers said. “Deterioration in I.R.S. enforcement effort and information gathering is scandalous. The Biden plan would make the American tax system fairer, more efficient and, I’m confident, raise more revenue than official scorekeepers now forecast — likely a trillion over 10 years.”
Summers’ comment highlights the size of the problem the Biden proposal is attempting to address. IRS Commissioners Charles Rettig recently told Congress that the tax gap, or the difference between taxes that are owed and what is collected, could be $1 trillion a year or higher.
Not everyone is on board: Republicans, who led the charge against the IRS starting with the tea party in 2020, are likely to be cool at best toward the effort to revive the agency. Anti-tax activist Grover Norquist, who frequently aligns with the GOP, said he feared an increase in politically motivated audits and expressed doubts that the IRS is capable of increasing revenues. “Nothing says these guys are going to raise money,” he told the Times. “The I.R.S. has been highly politicized for a long time. They’ve done nothing to fix it.”
Although Norquist’s opposition is hardly surprising, other less-politically motivated critics also say there could be problems with Biden’s plan. Former IRS Commissioner John Koskinen, who served under Presidents Obama and Trump, said the proposal may provide more funding than can be productively used. “I’m not sure you’d be able to efficiently use that much money,” he told the Times. Instead of $80 billion over 10 years, Koskinen said that $25 billion might be more appropriate, enough to bring the agency back to the size and strength it was in 2010.
A Major Change in Taxing Estates
Biden is also expected to propose two changes to the tax code affecting wealthy households that together could generate hundreds of billions of dollars in revenues over 10 years.
First, the president wants to roughly double the capital gains tax rate for households earning more than $1 million per year, requiring them to pay the same rate as applied to ordinary income, which he also wants to raise to 39.6%, up from the current 37%. Combined with the existing surtax on investment income of 3.8%, used to help fund Obamacare, those provisions would produce a top capital gains tax rate of 43.4%.
According to an analysis by the Tax Policy Center, the capital gains tax increase is projected to raise $370 billion over 10 years.
Second, Biden wants to end the “step-up in basis” on estates, which allows many inheritances to go untaxed. The current rule allows heirs to set the value of inherited property at the time of death, wiping out all capital gains up until that point for tax purposes. Instead, Biden is expected to propose that heirs pay taxes on all capital gains, measured from the time property was acquired — resulting in much higher tax bills on inheritances in wealthy families.
The combo could be the key: According to a widely-discussed analysis by researchers at the Penn Wharton Budget Model, rather than raising revenues, Biden’s proposed increase in the capital gains tax rate could be counterproductive, producing a loss in revenue of $33 billion over 10 years. That’s because capital gains taxes are relatively easy to avoid. Wealthy investors can simply not sell their assets, instead passing them along to their heirs, a move that under current rules effectively eliminates capital gains taxes. When combined with the elimination of the “step-up in basis” on estates, however, the increase in capital gains taxes is projected to raise revenues by $113 billion over a decade, Penn Wharton says.
Looking for the optimal rate: Economists may argue about what tax rate produces the most revenue, but there is general agreement that capital gains taxes can be counterproductive if they are set too high. Former White House economic adviser Jason Furman said Tuesday that the optimizing rate is probably close to 30%, but that’s only if investors can avoid taxes on their estate. Without that loophole, the optimal tax rate could be much higher.
“If you are also ending step-up basis at death (as Biden proposes), the revenue-maximizing rate is much higher — plausibly above 43.4%,” Furman said.
A relatively small pool: Brian Deese, the director of the National Economic Council, said the higher capital gains rate would apply to a very small group, “not the top 1%, it’s not even the top one-half of 1%.” About 540,000 taxpayers reported incomes over $1 million in 2018, according to tax data reported by CNBC.
White House steps back from estate tax rate increase: Although Biden pledged during the presidential campaign to increase the estate tax rate, Bloomberg said Tuesday that the White House would not include that provision in the proposal released this week.
Poll of the Day: Americans Approve of Biden’s Big Spending
A new Monmouth University poll finds broad support for President Biden’s multi-trillion-dollar spending plans on infrastructure and caregiving. Biden’s $2.3 trillion infrastructure proposal registers 68% support and 29% opposition, while his forthcoming American Families Plan to expand health care, elder care and child care has the backing of 64% of those polled compared to 34% who are opposed.
The poll also finds nearly two in three Americans support for Biden’s proposed tax increases on corporations and individuals earning more than $400,000 a year.
“The Biden administration’s presumption that spending programs are popular is borne out by these poll numbers,” said Patrick Murray, director of the Monmouth University Polling Institute. “The key to maintaining this level of support is whether Americans can point to direct benefits in their own lives once those plans are put into action.”
A recent NBC News poll found that Biden has a 53% overall approval rating and 59% of Americans call his infrastructure plan a good idea while 21% disagree. At the same time, Biden’s overall handling of tax and spending issues saw more people disapprove than approve.
Chart of the Day: A ‘Stunning’ Drop in Health Care Costs Under Medicare
Health care spending tends to increase with age, but a new analysis by the Kaiser Family Foundation finds that per-person spending among people aged 60 to 64 in large employer-provided insurance plans is actually significantly higher — 38% higher — than Medicare spending for people 65 to 69 years old.
“This is a stunning chart,” said Larry Levitt, the foundation’s executive vice president for health policy. “The amount it costs to provide health care to people with employer insurance rises steadily with age. Then, people turn 65 and go on Medicare, and the cost of health care drops precipitously.”
Why the huge drop? It comes down to price. As the KFF report explains, “Provider payment rates from private plans tend to be considerably higher than those paid by Medicare; for example, large employer plans pay between 1.6 to 2.5 times more than Medicare for the same type of inpatient admission. Over time, the payment rate differential has been increasing. If private plans paid the same rates as Medicare, their spending would decrease by 41%, or over $350 billion in 2021.”
A separate but related analysis published Tuesday by the Kaiser Family Foundation finds that if the Medicare eligibility age was lowered to 60, the costs for employer plans could drop by as much as 15%. Employer costs would fall by up to 30% if people age 55 and over were no longer covered by employer-sponsored insurance, and up to 43% if everyone 50 and older enrolled in Medicare.
“Lowering the age of Medicare eligibility could lower overall health care costs, but would also shift costs from employer plans to the Medicare program,” the foundation said in a news release. “Such a shift also would likely lead to lower revenues for hospitals, physicians, and providers who deliver care to older adults who choose Medicare over employer coverage.”