Bank tax reporting is a critical component of US agenda
The United States will lose an estimated $7 trillion over the next decade from people and corporations not paying the taxes they owe. That is twice the $3.5 trillion of investments that Congress is now considering in the budget reconciliation bill.
The richest 1 percent of taxpayers alone are responsible for an estimated $163 billion in unpaid taxes each year. Yet, due to Internal Revenue Service (IRS) budget cuts, the IRS has lost thousands of experienced enforcement personnel capable of thoroughly examining complex tax returns. Audit rates of high-income Americans and the largest corporations have plummeted, draining revenue and resulting in an increased share of examinations focused on recipients of the earned income tax credit (EITC), who are much more inexpensive for the IRS to audit. The status quo benefits wealthy tax cheats to the detriment of ordinary Americans. It also reinforces economic inequality, including the stark income and wealth inequities by race.
President Joe Biden's plan to improve tax enforcement is aimed squarely at fixing the broken and unjust status quo. The Biden plan has two main components: One is to fund IRS enforcement of high-income individuals and corporations, modern technology, and better taxpayer service; the second is to give the IRS greater visibility into opaque forms of income by requiring banks and other financial institutions to report very basic information about accounts.
The House Ways and Means Committee will begin to consider the tax provisions of the Build Back Better legislation starting tomorrow. Currently, the bank reporting proposal is not included in the committee's draft legislation because members of Congress continue to work out details. Given its critical importance, Congress must incorporate the bank reporting proposal into the legislation as it progresses.
The current two-tiered system of tax enforcement favors the wealthy over workers
Workers' wages and salaries are subject to thirdparty information reporting: Your employer is required to send matching copies of the W-2 to you and to the government showing exactly what you were paid. By contrast, the income received by businesses such as partnerships, S-corporations, and proprietorships-which flows heavily to the top end of the income distribution-is often not reported to the IRS by third parties. Consequently, taxpayers often do not report it on their tax returns.
The result is a two-tiered tax system where virtually all workers' wages are properly reported but business owners misreport income at shockingly high rates. (see Figure 1) The Biden proposal is aimed at leveling this two-tiered system so that ordinary Americans have greater confidence that others are not cheating while they pay full freight.
Recent trends in tax enforcement have worsened racial inequities. By slashing the IRS' budget, Congress has eviscerated the agency's ability to go up against wealthy individuals, who are disproportionately white, and large corporations, whose executives and shareholders are disproportionately white.
As tax scholar Dorothy Brown writes, "[R]ich white Americans tend to get tax rules designed for their benefit.