The Rich Are Hiding a LOT of Income, Treasury Says

The Rich Are Hiding a LOT of Income, Treasury Says

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Plus, Democrats consider chipping away at Biden tax on wealthy
Thursday, May 20, 2021

The Rich Are Hiding a LOT of Income, Treasury Says

Wealthy taxpayers are likely hiding half or more of their non-wage income from the IRS, the U.S. Treasury Department said Thursday as part of a new report detailing the Biden administration’s plans to raise an additional $700 billion in revenues through stepped-up tax enforcement.

The increased tax collections are a key component of President Joe Biden’s plan to pay for his $1.8 trillion American Families Plan, which would boost federal spending over 10 years on a host of social welfare programs, including public education, health care, child care, paid leave and nutrition assistance.

Minding the tax gap: The Treasury estimates that the tax gap — the difference between taxes that are owed and the amount that is actually collected — amounted to nearly $600 billion in 2019. In the absence of any changes in policy, that gap will total roughly $7 trillion over the next decade, representing 15% of all taxes owed.

“These unpaid taxes come at a cost to American households and compliant taxpayers as policymakers choose rising deficits, lower spending on necessary priorities, or further tax increases to compensate for the lost revenue,” the report says.

The largest contributor to the tax gap is connected to what the Treasury calls “less visible sources of income” — the billions of dollars that flow through “opaque income sources that accrue disproportionately to higher earners,” such as business partnerships and rental properties.

Unlike most labor income, which is reported directly to the IRS and is very hard to avoid paying taxes on, less visible income is easy to hide. The Treasury estimates that only about 45% of all such income gets reported and taxed, leaving the other 55% to flow into owners’ pockets tax-free (see the chart below).

Closing the gap: In keeping with Biden’s proposals, the report lays out four ways to close the tax gap: rebuilding the IRS, which has seen its budget cut by 20% over the last decade, at a cost of $80 billion over 10 years; requiring financial institutions to report all income flows directly to the IRS; providing modern technology for the IRS to replace systems that date back to the 1960s; and tighter regulation of tax preparers, with more substantial penalties for those who cheat.

According to an analysis by the Treasury Office of Tax Analysis, those measures could bring in an additional $700 billion over the next 10 years — an estimate the report says is on the conservative side. Some of the measures will take time to implement and produce fruit, so the revenues will increase over time, with estimates rising to $1.6 billion over the second decade.

But will the scorekeepers agree? While the Biden administration says it can raise huge sums through better enforcement of the tax code — and some experts have suggested that the Biden analysis is indeed conservative — other analysts have their doubts. “I don’t see any way they get to $700 billion, honestly,” former Congressional Budget Office Director Douglas Holtz-Eakin, now president of the conservative American Action Forum, told Bloomberg. “They should be thrilled to get to $200-250 billion.”

The official Congressional Budget Office estimate could prove critical. While the CBO provided no comment on the new Treasury report, experts say that the agency is unlikely to produce numbers as large as Biden’s if and when it analyzes the president’s proposal. Lower revenue estimates would further complicate an already difficult path for Biden’s plans, making it that much harder to build support among lawmakers looking to avoid passing another deficit-financed spending package.

House Narrowly Approves $1.9 Billion to Fortify the Capitol

In a close and politically charged vote Tuesday, the House passed a bill that would provide $1.9 billion to beef up security at the Capitol in the wake of the January 6 riots.

New protective measures include more robust windows and doors in the Capitol complex, additional surveillance cameras, retractable perimeter fencing and the creation of a new rapid reaction force. The bill would also provide enhanced protection for lawmakers and federal judges who are prosecuting the rioters, as well as funding to repay the Capitol Police and other agencies that helped defend the Capitol during the assault.

The 213-212 vote came just a day after the House approved the creation of a bipartisan panel to examine the riots, which were led by supporters of former President Donald Trump who sought to overturn the results of the presidential election. Both bills face an uncertain fate in the Senate.

House Republicans opposed the bill unanimously, claiming that new fencing is unnecessary and that the overall cost is too high. Some GOP lawmakers said the money would be better spending building the border wall with Mexico.

A small group of liberal Democrats opposed the bill as well, with some objecting to providing additional funding to the police. Only a last-minute compromise in which three progressive Democrats (Jamaal Bowman and Alexandria-Ocasio Cortez of New York and Rashida Tlaib of Michigan) voted “present” allowed the bill to pass by the narrowest of margins.

Democrats Consider Chipping Away at Biden Tax on Estates: Report

In another sign of just how challenging it may be for President Biden to win support for his proposed tax hikes even among Democrats, Bloomberg News reports that staffers for House Ways and Means Chairman Richard Neal have floated an idea to chip away at a key element of Biden’s plan to raise taxes on the wealthy.

Biden has proposed ending the so-called “step up in basis” that allows heirs to reset the cost basis of inherited assets based on market value at the time of inheritance. As it now stands, that step up in basis enables heirs to avoid paying capital gains taxes on years’ worth — or decades’ worth — of appreciation in asset values after their initial purchase, allowing accumulated gains to be passed down, untaxed, from generation to generation, which the White House and others argue exacerbates inequality.

Biden has proposed raising the capital gains tax rate for households making over $1 million from 20% to 39.6%, putting it on par with the tax rate on earned income. In tandem with that, he has proposed eliminating the step up in basis for gains over $1 million (or $2.5 million per couple), with exceptions for family-owned businesses and farms. The Tax Policy Center estimates that, in all, Biden’s changes to the capital gains tax would raise about $370 billion over a decade. The more conservative-leaning Tax Foundation estimates that the changes would raise about $213 billion over a decade.

Staffers for Neal, head of the House’s tax-writing committee, reportedly have raised another option: allowing heirs to defer their capital gains tax bills for as long as they hold the inherited assets. Whereas under Biden’s plan, the transfer of assets would be a taxable event, Neal’s alternative would mean that heirs would only face a tax bill if or when the inherited assets are sold.

The change would ward off criticisms that Biden’s plan could create a cash crunch for some people who inherit hard assets like real estate or businesses and force those heirs to immediately sell off their inheritances. On the other hand, the idea from Neal’s staff “would give beneficiaries of large estates the incentive not to sell, known as the lock-in effect, and it would mean bringing in less money to pay for Biden’s $1.8 trillion American Families Plan,” Bloomberg’s Nancy Cook and Laura Davison write.

Neal’s staff reportedly was just presenting options rather than a definitive proposal, and other Democrats remain intent on ending stepped-up basis. “By allowing the richest people in American to avoid paying taxes on their capital gains, stepped-up basis is a seminal driver of the economic inequality that is slowly poisoning the United States,” Rep. Bill Pascrell (D-NJ), a member of the Ways and Means Committee, said in a statement to Bloomberg. “I am always open to discussing avenues to strengthen legislation that addresses tax inequities. But our focus remains on sealing shut this loophole.”

Why it matters:
Biden has proposed ways to pay for his $4.1 trillion in newly proposed spending, but Republicans have rejected the idea of tax increases — and some Democrats have major concerns about various parts of Biden’s tax plans, ranging from his corporate tax hike to the capital gains changes. Democrats will have to overcome their own intraparty differences to pull together any package of tax increases.

White House Says GOP Governors Are Cutting Off Jobless Benefits Too Quickly

A top economic adviser to President Biden said Thursday that Republican governors were being premature in cutting enhanced unemployment benefits provided as part of the pandemic relief package passed in March.

Cecilia Rouse, chair of the Council of Economic Advisers, said at a Bloomberg conference that the extra payments are still needed. “There will come a day when we do not need these additional supports. There’s no question, these were designed to get us to the end of the pandemic. But we’re not there yet,” Rouse said.

The enhanced payments have become the subject of debate after the monthly employment report for April showed a much weaker than expected 266,000 jobs added, spurring some economists and governors to argue that the $300 weekly federal supplement to state jobless benefits was creating a powerful incentive for workers to stay out of the labor market. Other economists, at the White House and elsewhere, have said that other factors, including pandemic fears, a desire for higher wages and a need for childcare, may play a larger role.

Rouse reportedly also cited the timing of the monthly unemployment survey, arguing that more jobs were added as the pace of Covid vaccinations picked up later in April. “We will get back to a full recovery and by the end of the year we will be in really good shape,” she said.

What’s at stake: Texas, Indiana and Oklahoma on Monday became the latest states to say they would end the $300 federal benefit boost well ahead of its September expiration, joining nearly 20 other Republican-led states.

In total, jobless workers in at least 22 states are set to see their unemployment payments fall by $300 a week or get wiped out completely, The Washington Post says. Nearly 3.7 million out-of-work Americans will lose benefits in June or July, according to an analysis by The Century Foundation cited by CNN. These workers will lose out on nearly $22 billion in benefits. “The financial burden could fall hardest on about 2.7 million workers who are at risk of seeing their benefits eliminated entirely,” the Post says. “That includes Americans who have been out of work for so long that they have exhausted state allocations as well as those who are self-employed and participating in a program known as Pandemic Unemployment Assistance.”

Biden in a bind:
The Biden administration may be opposed to cutting off the enhanced benefits, but there’s apparently not much it can do to prevent it.

The Washington Post’s Tony Romm and Eli Rosenberg report that Labor Department officials have concluded that the law does not offer them a way to keep the extra benefits flowing:

“The Labor Department generally can’t force GOP leaders to pay the federal stimulus benefits under a national unemployment system that gives states broad latitude to implement their own systems … . Nor can federal agencies circumvent Republicans by administering unemployment checks on their own or through cooperating agencies in other states, according to those familiar with its thinking. Even if the Labor Department had the authority, the agency probably would face significant legal, logistical and technological hurdles in distributing the aid swiftly — a complex task involving a web of technology and personnel that has flummoxed many state agencies despite decades of experience.”

The bottom line: Federal officials reportedly believe that any reversal of the GOP state changes must come from Congress, which as of now appears unlikely to act.

And some reason for optimism: About 444,000 Americans filed first-time jobless claims last week, the Labor Department said Thursday. That’s the lowest number of new filings since March 14, 2020.

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