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Increasing the flow of funds into the US Treasury without increasing taxes?

John Havard examines two bills raised by Democrat Representatives which could pave the way for mandatory audit targets for large corporations, large estates, and high net worth individuals.

Absent the discovery of a magic money tree in the US Treasury, everyone knows that action will be required to fund the cumulative costs of Covid-19 relief measures. During the election campaign, President Biden spoke of wanting to ensure that corporations and high-net-worth individuals pay “their fair share”. At its face value, that sounds like closing perceived ‘loopholes’ and raising tax rates. Such actions may well be proposed, but it is a long journey from proposal to enacted legislation.

Furthermore, with the present 50:50 balance in the Senate, that journey is potentially hazardous. In the event of a tied vote in the Senate, the Vice-President has the casting vote. However, unless some bi-partisan support can be built, it only requires one Democrat Senator to go ‘off-message’ for a proposal to be lost. Already, two Democrat Senators have indicated that they will not support a particular element in the proposed relief package.

So far, the Biden Administration has been concentrating on Covid-19 relief measures. There has been an absence of comment, either on or off the record, of what will be required to fund this ‘big ticket’ relief. Presently, the only apparent area of bi-partisan agreement is a desire to change the taxation of carried interests in private equity and hedge funds. That might be a revenue raiser, but it will not come near to producing the funding needed for Covid-19 relief and other projects.

However, we may just be witnessing the birth of an idea which could have bi-partisan appeal. A way to rake in the money, with little or no alteration to tax rates. Two different Bills introduced in the House by Democrat Representatives may be the precursors to something similar coming with the blessing of the Biden Administration’. Both Bills proceed from the assumption that there is a lot of currently uncollected revenue in the hands of two distinct groups of taxpayers. These are large corporations and high net-worth individuals.

While differing in some of the detail, both Bills propose a major budget increase for the Internal Revenue Service (IRS), with the lion’s share of that new funding being devoted to the aggressive auditing of the two target groups. It is worth noting that President Biden has also spoken in favour of expanding the audit capabilities of the IRS, as part of a broader overhaul of the tax system.

The most recent statistics for IRS audit activity relate to the 2018 tax year. The numbers revealed there do suggest that a major increase in audit activity could be an efficient revenue raiser. For example, only 0.03% of 2018 individual returns with at least $10 million of income were audited.

To illustrate what enhanced audit activity would mean in practice, one of the Bills proposes setting the following mandatory targets for IRS audit activity.

Targeted Taxpayer Group Portion of Taxpayer Group Subject to Mandatory Audit
Corporations with at least $20 billion of assets

95%

Individuals with at least $10 million of income

50%

Individuals with income in the range $5-$10 million

33%

Individuals with income in the range $1-$5 million

20%

Estates worth more than $10 million

40%

 

The same Bill proposes penalties as high as 40% on underpayments of tax revealed in these audits.

Lots of Bills get proposed in both the Senate and the House but eventually get nowhere. However, revenue raisers that were attached to failed legislation have a habit of reappearing later as the means of financing legislation proposed in a different Bill.

The idea of funding a major increase in IRS audit activity is one to watch. It aligns with what the President has previously said and it has obvious scope for bi-partisan appeal in both House and Senate as a means of drawing in money without violating the red lines of party dogma.

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