The president wants to spend $2 trillion and defray half of that with unpaid tax money. Here’s why it won't work
Any day now, President Biden will officially roll out his big infrastructure plan – which sounds good since we all want to fix our decaying roads, airports, and bridges. It’s been talked about and chewed over so much, the only surprise will be in the details.
Broadly speaking, the White House wants to spend $2 trillion on everything from fixing bridges to expanding WiFi to investing in green energy. That’s more money than the United States government has ever spent at one time, and Democrats are hoping to blunt Republican criticism by paying for half of that by cracking down on rich tax cheats. Of course, politics is theater: Those rich people must be the villains, and they must be cheating. Or they wouldn’t be so rich. In my experience, tax cheats can come from all socioeconomic backgrounds.
“This is an issue we’re looking at closely,” Senate Finance Committee Chair Ron Wyden (D-Ore.) told Politico on Tuesday. “The revenue generated from going after wealthy tax cheats should be counted toward the revenue needed to pay for critical investments in the American people.”
Maybe it should be, but it can’t be.
There are three reasons for this. The first is political and cynical, the second is legislative and boring, and the third is simple and, frankly, downright obvious even to someone who isn’t a CPA like myself.
1. Political and cynical
Let’s start with the most basic assumption: Is there really $1 trillion in uncollected tax revenue out there? Truth is, no one knows—the government is guessing.
In April of this year, IRS Commissioner Charles Rettig testified to Congress, “I think it would not be outlandish that the actual tax gap could approach and possibly exceed $1 trillion.” He cited no internal research or independent study. Yet Democrats have latched onto this one opinion—Rettig began with I think—to claim their massive infrastructure plan is actually affordable.
Whether you’re in favor or opposed to some or all of Biden’s plan, do you really want to rely on one comment from one man?
Indeed, the National Bureau of Economic Research (NBER) reported in March, “36 percent of federal income taxes unpaid are owed by the top 1 percent” and “collecting all unpaid federal income tax from this group would increase federal revenues by about $175 billion annually.”
You don’t need to be a CPA to know that falls far short of the $1 trillion that’s being currently touted.
2. Legislative and boring
I don’t want to dive too deep down this rabbit hole, so let me over-summarize: Among the hundreds of arcane rules that Congress has, one of them stops lawmakers from counting money it hasn’t collected yet. That sounds basic, but the rule exists because both Democrats and Republicans have tried to justify spending programs and tax cuts by saying more money is coming into government coffers very soon.
Or as the Congressional Budget Office explains it, Congress must “exclude from cost estimates any budgetary savings that might arise when mandatory funding is provided for program management or administration.”
I only mention this because it leads directly into the third reason…
3. Simple and obvious
Simply put, you can’t count on raising any money this year from tax cheats because it takes time to catch them—and it takes even longer to get paid…if ever.
First, the IRS has to recruit more auditors. Besides the cost of doing that—which Biden pegs at $1.2 billion—is the time involved. Anyone who’s hired employees knows it doesn’t happen as quickly as those Indeed commercials lead you to believe.
Second, those auditors need to be trained. The IRS isn’t known for the clarity of its tax code. Since the IRS, has recruited staff from a variety of non-financial disciplines over the past decade due to the continual shortage of accountants it will likely take years before they can be effective tax collectors.
Third, the audits themselves are complex take time. There are three basic kinds:
- Correspondence audits happen via the mail and are the simplest and fastest. They can take a month, but these aren’t how you catch tax cheats.
- Office examinations happen when you’re summoned to an IRS audit and told to bring your documentation with you. These can take months not days to resolve, but again, this isn’t how you land the big fish.
- Field examinations happen when IRS agents descend upon your home or business. They need to be there to inspect complex documentation. These can drag on for years.
It doesn’t end with the audit, however. The IRS has an appeals process, and wealthy people have access to armies of lawyers. As the California Society of CPAs says, “Normally, you should receive a response to your request for an appeal within 90 days.” Then you schedule an appeals conference. “Once you’ve had your appeals conference, it may take anywhere from 90 days to a year for your case to be resolved.” Let’s not forget about all the cases that are currently backed up from the pandemic this backlog can alone take years to get through.
The bottom line is that you can’t count on tax-cheat revenue to contribute to paying for Biden’s spending plan.
Published by Debt.com, LLC