White House officials plan to make a massive increase in enforcement at the Internal Revenue Service a central component of the tax proposal they will unveil this week alongside a $1.8 trillion spending package, according to four people briefed on the matter.
President Biden’s American Families Plan, set to be released ahead of the president’s joint address to Congress on Wednesday, calls for devoting hundreds of billions of dollars to child care, universal prekindergarten, and paid family and sick leave, among other domestic priorities.
The tax side of the plan to pay for those efforts includes increasing the amount of capital gains paid by investors who earn more than $1 million annually, as well as increasing the top income tax rate.
But probably the single biggest source of new revenue in the plan comes from dramatically expanding the clout of the nation’s tax agency. It seeks to beef up the number of agents and give the IRS new tools and technology to execute collections and crack down on avoidance, the people said. White House officials have eyed raising as much as $700 billion from toughening IRS enforcement and auditing over 10 years, two of the people said, although the precise amount in the plan remained unclear. Enforcement will be focused on the wealthy, the people said.
The people spoke on the condition of anonymity to discuss private administration deliberations. Officials cautioned the plan had not been finalized. White House officials are looking at increasing the agency’s budget by $80 billion over 10 years, a figure first reported by the New York Times.
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. The IRS lost roughly 18,000 full-time positions after 2010, due primarily to cuts pushed by Republicans in Congress under President Barack Obama, with the number of auditors falling to lows unseen since the 1950s.
Those changes have hampered the IRS’s ability to collect taxes even from those who legally owe them, particularly among the rich. Former IRS commissioner Charles Rossotti joined economists Larry Summers and Natasha Sarin in a recent analysis that found the tax agency could raise as much as $1.4 trillion in additional tax revenue with better data, technology and personnel. Sarin is now deputy assistant secretary for economic policy at the Treasury Department under Secretary Janet Yellen. IRS Commissioner Charles P. Rettig told Congress earlier this month that it “would not be outlandish” to believe the tax gap could exceed $1 trillion annually. The tax gap is the difference between the amount of taxes owed and the amount of tax revenue collected.
White House officials learned during the process of drafting the American Families Plan that they could raise significantly more money from the plan than they initially anticipated, two people familiar with the matter said. Senior administration officials consulted with career staffers at the Treasury Department about revenue estimates, one person familiar with the matter said.
“Democrats believe we should audit rich tax cheats more than poor grandmothers who claim a kid as a dependent,” said Rep. Ro Khanna (D-Calif.), the author of the Stop CHEATERS Act, a sweeping bill aimed at dramatically increasing enforcement, auditing and reporting requirements. Khanna noted widespread support from Democrats’ disparate factions for the measure. “I am happy to have that debate with Republicans every day between now and 2022.”
Pinning a significant part of the plan on strengthening the nation’s tax collector is not without its political and budgetary risks, however.
Republicans frequently attacked Obama’s handling of the tax agency for what they called its excessive overreach, culminating in a major controversy over the agency’s handling of conservative nonprofit groups. Some Republicans have expressed openness to increasing the IRS budget but are unlikely to go along with the increases proposed by the White House as it seeks to raise trillions of dollars in new revenue. Rep. Kevin Brady (R-Tex.), who helped craft the GOP’s 2017 tax bill, said this month that Biden’s infrastructure and jobs plan is “about tax hikes on the American people to pay for the socialist agenda.”
Biden is also asking the IRS to handle several important new obligations, including administering a new monthly child benefit. His plan to expand paid family leave could also add to the agency’s existing but extensive to-do list.
And there is uncertainty about exactly how much revenue can be raised by beefing up IRS enforcement. The Congressional Budget Office — Congress’s official scorekeeper — has generally found a smaller impact than some independent economists.
Still, liberal tax experts see Biden as capitalizing on an important opportunity to both combat inequality and raise government revenue. The richest 1 percent of Americans underreport more than one-fifth of their actual income, according to a National Bureau of Economic Research paper published last month. Audit rates for that richest 1 percent have fallen from about 8 percent in 2011 to 1.6 percent in 2019, the paper found.
“That’s not enough to catch all the tax dodgers out there — and this imposes a growing cost to all law-abiding taxpayers,” said economist Gabriel Zucman, one of the report’s authors. “There would be a high return from having more agents on the ground auditing the increasingly complex tax returns of the rich.”