The Rich Are Hiding a LOT of Income, Treasury Says

By Yuval Rosenberg

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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