Biden Takes a Whack at Tax Perks for the Rich

By Yuval Rosenberg

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.”

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