PIE-IN-THE-SKY PAYMENT PLAN
PROBLEM ONE
The “spend for 8 years, tax for 15 years” plan can’t even logistically work because Joe Biden has zero control over what happens in fifteen years. When he took office, he only had “control” for the next four, possibly eight, years, and even that’s a stretch given our practically dead even Congress.
Meanwhile, the funding strategy for the American Families Plan was no more realistic. This plan allocated money for universal pre-K, free childcare, two years of free community college for all, a paid family and medical leave program, Affordable Care Act subsidies, scholarships for teachers, increased Pell Grants, and expanded nutrition programs, among many, many more things. It also claimed to help solve climate change and racial inequities, end child poverty, and ensure world peace (okay, we made that last one up).
For this phase of the plan, President Biden intended to impose new taxes on rich people. This included almost doubling the capital gains tax to 39.6 percent for people earning over $1 million a year (this would be the highest capital gains tax in a hundred years). Plus, the top marginal income tax rate would increase from 37 percent to 39.6 percent (effectively rolling back Donald Trump’s tax cut).
An additional part of the payment strategy called for the Internal Revenue Service (IRS) to crack down on legally owed but uncollected taxes. The U.S. Treasury’s Office of Tax Analysis claims this increased enforcement would raise $700 billion in new revenue over ten years, plus $1.6 trillion in the following ten. The Biden Administration reckoned it would take giving the IRS at least $80 billion and doubling the size of the agency to achieve this threshold.
< Note: Either way, it’s clear we must bring the IRS into this century. Our tax collector is running on technology that is over six decades old. In a January 2023 report, the Government Accountability Office (GAO) found that:
“The Internal Revenue Service’s (IRS) legacy IT environment includes applications, software, and hardware, which are outdated but still critical to day-to-day operations. Specifically, GAO’s analysis showed that about 33 percent of the applications, 23 percent of the software instances in use, and 8 percent of hardware assets were considered legacy. This includes applications ranging from 25 to 64 years in age, as well as software up to 15 versions behind the current version. As GAO has previously noted, and IRS has acknowledged, these legacy assets will continue to contribute to security risks, unmet mission needs, staffing issues, and increased costs.” >
Unfortunately, the Congressional Budget Office (CBO) found that Biden’s IRS crackdown plan would only yield around $120 billion over the next ten years, far (far!) less than the Biden Administration was banking on.
The Penn Wharton Budget Model’s numbers were a little bit better than that — they estimated that enhanced IRS tax collection enforcement would actually bring in “almost $480 billion in additional revenue” over the next 10 years — but both of these are way off the $700 billion in new revenue over 10 years, plus $1.6 trillion in the following ten the Biden administration was banking on.
Setting aside the $80 billion and increase in the size of the IRS for a moment, this is not necessarily a bad thought process. In fact, 1787’s thought process for Operation Overhaul — where we will end the massive inefficiency and waste that infects every level of our federal government and use these found funds solely for the purpose of reducing our debt and closing the gap on our deficit — is somewhat similar on paper. But 1787’s outcomes rely on finding and improving the endless wasteful practices within the U.S. government, not a big Easter Egg hunt in the Cayman Islands.
Plus, it is highly doubtful that this effort would bring in anywhere close to $700 billion in 10 years… especially when, in the very same breath as saying how much money they plan to recoup, the Treasury Department assured everyone earning less than $400,000 per year that audit rates “would not rise relative to recent years.” Say whaaaat? That leaves out over 40 percent of all taxpayers and relies solely on the audits of, by far, the most complicated returns. That doesn’t even make sense.
Five former U.S. Treasury secretaries from both Republican and Democratic administrations — Timothy F. Geithner, Jacob J. Lew, Henry M. Paulson Jr., Robert E. Rubin and Lawrence H. Summers — said in a New York Times guest essay that unpaid taxes are a $600 billion per year problem that could total over $7 trillion over the next ten years if left unaddressed. They write, in part, that:
Over the past 25 years, IRS resources have been steadily cut, with the ratio of enforcement funding to returns filed falling by around 50 percent. Today, the IRS has fewer auditors than at any time since World War II. Faced with resource constraints, it is no surprise that the agency is not able to appropriately focus scrutiny on complex returns, where noncompliance is greatest. Of about four million partnership returns filed in 2018, the IRS audited only 140 of them. It did not pursue 300 high-income taxpayers who together cost the agency $10 billion in unpaid taxes over a three-year period when they failed to even file returns. And audit rates of those in the top 1 percent have fallen most staggeringly over the course of the past decade, such that rural counties in the Deep South have some of the highest rates of examination in the country.
They believe that doing more to retrieve uncollected taxes is possible but will require a very comprehensive overhaul, including significant information technology (IT) advancements and better customer service. These are all super smart guys who have seen the deficiencies in the IRS firsthand.
But as Biden’s plan was originally written, the Penn Wharton Budget Model estimated that enhanced IRS tax collection enforcement would actually bring in “almost $480 billion in additional revenue” over the next ten years, which is a far cry from $700 billion in new revenue over ten years, plus $1.6 trillion in the following ten.
Analysis from the Congressional Budget Office (CBO) is perhaps the most telling assessment of all:
The difference between the amount of taxes owed and the amount collected each year — often called the tax gap — is estimated periodically by the IRS. The gross tax gap is the amount that taxpayers do not pay by their filing deadline. As such, it measures the extent of noncompliance with the tax code. In its most recent report, the IRS estimated that the annual gross tax gap was $441 billion, on average, between 2011 and 2013. The IRS ultimately collects some of that amount. The net tax gap, which is the gross tax gap reduced by the amount that the IRS collects through its enforcement activities, was an estimated $381 billion annually over that period.
On the basis of its analysis of the effects that different funding levels have had on IRS enforcement, CBO estimates that increasing the IRS’s funding for examinations and collections by $20 billion over 10 years would boost revenues by $61 billion, resulting in a $41 billion decrease in the cumulative deficit; increasing such funding by $40 billion over 10 years would boost revenues by $103 billion, resulting in a $63 billion decrease in the deficit.
continue to problem two