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Audit the Rich

Joe Biden’s simple, necessary, way overdue plan to fund the welfare state.

A brick on the exterior of the IRS building in Washington reads "Internal Revenue Service"
Chip Somodevilla/Getty Images

Joe Biden wants to fund a massive upgrade to the American welfare state by making the IRS great at audits again.

The president plans to propose $80 billion in additional new funding over a decade for the resource-starved agency in order to beef up enforcement against tax cheats. Averaged annually, it would be a two-thirds increase over its current budget of just under $12 billion. The administration believes this massive infusion of cash will help the IRS collect an extra $780 billion over a decade that would otherwise go missing. That money would be used to help finance the administration’s new package of family and anti-poverty proposals, which it will unveil on Wednesday and is expected to cost around $1.8 trillion.

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It’s a sensible, long-overdue move that could help fund badly needed social spending while bringing a modicum of fairness back to America’s run-down tax enforcement system. The IRS has been gutted by years of budget cuts—largely thanks to Republicans who peddled a fiction that it had harassed conservative nonprofits—which reduced its workforce by 22 percent between 2010 and 2019 and left it with its lowest number of revenue agents since the 1950s. As a result, the agency’s audit rate has plunged by around half. With its depleted, shoestring budget, the agency has shied away from scrutinizing the tax returns of wealthy Americans—from 2012 to 2020, the number of millionaires audited fell by 72 percent—and devoted resources to chasing after poorer and working-class households that make mistakes filing for the earned income tax credit, both due to pressure from Republicans and because it’s easier than dealing with millionaires who can hire lawyers.

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As the IRS has withered, the country has allowed massive amounts of revenue to slip through its fingers each year. Earlier this month, IRS Commissioner Charles Rettig said that the country was allowing $1 trillion in taxes to go uncollected every year, much larger than the last official estimate of $441 billion a year on average from 2011 to 2013. “We do get outgunned,” he told lawmakers at a Senate Finance Committee hearing. The agency is struggling with new challenges, like the proliferation of cryptocurrency, as well as old ones, like offshore evasion.

The situation has become so dire that even Republicans have become open to budget increases for the IRS (and it did receive a bump as part of the bipartisan government funding and COVID relief legislation in December). But over the last few years, a number of Democrats have argued that the party should think bigger and try to tap into the vast pool of uncollected money that seems to be falling into the tax gap. During her presidential campaign, Sen. Elizabeth Warren suggested that Washington could snap up $2.3 trillion over a decade purely through better enforcement. Though many found that implausible, former Treasury Secretary Larry Summers and then–University of Pennsylvania law professor Natasha Sarin argued in a paper that the government could realistically collect about $1 trillion.

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Sarin recently joined the Biden administration as an official in the Treasury Department. And as the New York Times reports, the Biden proposal will include some of the suggestions she and Summers made, including funneling money in technology improvements to automatically detect discrepancies on returns and better catch tax dodgers, while also vastly increasing audits of the rich. It would also create new requirements that banks report information on their clients’ business incomes—a slightly boring-seeming idea that could profoundly improve the IRS’s collections.

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The reason is that the extent to which Americans file their returns honestly more or less depends on whether a third party is also supplying their information to the IRS. Taxpayers rarely misreport their wages and salaries because their employers send their W-2s to the government. Certain kinds of self-employed workers and business owners—such as landlords, farmers, and sole proprietorsconstantly underreport their income, however, because they face little or no third-party reporting. They can basically fudge their taxes without worrying about getting ratted out.

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While Biden’s plan to fund his ambitious welfare state agenda by making business owners pay the taxes they already owe seems like a safe political bet, it’s already taking heat from anti-tax advocates and at least one prominent moderate. Former IRS Commissioner John Koskinen, who served under Obama and Trump, told the Times he isn’t sure that the IRS will be able to effectively use all of the money, and suggested $25 billion would be a more realistic figure. (Fred Goldberg, a veteran of the George H.W. Bush years, on the other hand, called the plan “transformative.”)

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The Congressional Budget Office could also pose a challenge. Capitol Hill’s official scorekeeper has previously suggested that increasing the IRS budget would raise relatively little revenue—it estimates that a $40 billion bump for the agency would decrease the deficit by just $63 billion over a decade. Part of the reason is likely that the CBO has based its forecasts on a smaller, more modest change in the IRS’s operations than the fundamental overhaul that Summers and Sarin proposed and that Biden has now embraced. But it’s unclear how the office will assess the administration’s new plan.

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Even if the budget office does conclude that the White House’s proposal would raise a great deal of money, it might fall short in aiding Biden’s goal of passing an ambitious social spending bill. The reason is soul-crushingly dull and technical: Under its official guidelines, the CBO is not allowed to count all of the revenues that IRS could bring in from better enforcement when it scores a piece of legislation (the rule is meant to prevent Congress from engaging in obvious budget shenanigans). So under the current rules, raising a ton of money through auditing rich folks won’t necessarily make a bill look any cheaper on paper, or help it meet the deficit requirements for passing via the budget reconciliation process, which Democrats will likely have to rely on to avoid a filibuster. Just to make things more complicated, the CBO may be able to count the money raised by the new information-reporting rules. But congressional leaders and the White House may need to push for changing these rules.

But that’s all a bit in the weeds. The important point is that Biden wants to give the IRS the weapons it needs to take on America’s large class of tax cheats. It’s about time.

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