This post is a compilation of some recent minor federal tax developments, along with my reactions to them. Most should hit delete now; I’m just archiving links to and my thoughts on these stories for my future reference:
- Pro-publica leaker pleads guilty
- New tax gap estimates
- Hunter Biden’s taxes
- IRS picks states for free file pilot program
- IRS delays pay-fors
- Paul Ryan’s presentation at Brookings
Leaker caught
It took over two years, but the source of the illegal disclosure of tax return information, leaked to the NY Times and ProPublica has been caught (WaPo 9/29 story) and plead guilty to a felony count with a maximum 5-year prison term (WaPo 10/12 story). He is a contractor who worked for the IRS. The stories say nothing on this front, but the plea may be a prelude to his providing prosecutors with help in charging and convicting others. It’s hard to imagine one person pulling this off alone and it’s unclear why a contractor would have such extensive access to the universe of return data for multiple years. If he was writing and testing software, for example, access to a sample of returns would seem adequate.
It’s not clear what he was doing as a contractor. Tax Notes (no paywall) reports:
Prosecutors said the returns were accessed from an IRS database after the contractor used “broad search parameters designed to conceal the true purpose of his queries” and was able to evade IRS protocols for preventing or detecting the downloads.
IRS Contractor Pleads Guilty to Leaking Tax Data to News Outlets (10/12/2023).
According to WaPo, the scope of the leaks was stunning to congressional and IRS officials. Breaches of confidential tax data historically have been rare. The leaks obviously were politically motivated either to damage Trump or to create a climate favorable to increasing taxes on high-income filers or both.
According to CNN, because there were so many victims:
[P]rosecutors have asked Reyes [the judge] for permission to create a public website to notify the victims without reaching out to each person individually.
Former IRS contractor who allegedly leaked Trump’s tax information set to plead guilty, CNN (10/6/2023)
Here’s a link to the DOJ website. At least one hedge fund magnate has sued the IRS for damages. He may be embarrassed that his peers now know he paid a 29% effective rate, much higher than most of them, all of whom benefit from the carried interest tax break (taxing their compensation at long-term capital gains rates). I assume he has a tall legal hill to climb to prevail, given the rules of governmental immunity.
Victim statements are typically given at sentencings. Trump couldn’t wait and sent an attorney to the hearing who called for imposing the maximum 5-year sentence. The judge’s response, as reported in the 10/12 WaPo story, was that the former president could come and deliver his own statement at the sentencing in January. That seems a little caddy, since victim statements are typically received in manners that accommodate victims. The DOJ website says you can email in your victim impact statement. Objectively, it’s unclear how much Trump has cause to complain, since Ways & Means Democrats legally released his returns to the public later on. So, all the defendant’s conduct did with respect to Trump was to speed up public access to his returns, it would seem to me anyway. Of course, there is the matter that the 2020 election happened in between the two releases.
From what I can tell, the disclosure has not affected congressional actions on tax policy, contrary to what ProPublica expected or hoped for. Rather than sparking outrage (unlike somewhat similar but legal disclosures in the 1960s), it likely confirmed what the public had assumed. Many top earners pay low tax rates and in some years little or no tax. The fact that Trump essentially bragged about paying very little tax during the 2016 presidential debate and suffered no apparent ill political consequences for doing so is another data point supporting that view. The risk, as I always feared, is further undercutting confidence in the IRS and in the security of tax data.
As an aside, WaPo quotes the NY Times reaction as follows:
Charlie Stadtlander, a Times spokesman, said in an email Thursday night: “We remain concerned when whistleblowers who provide information in the public interest are prosecuted. The Times’s reporting on this topic played an important role in helping the public understand the financial ties and tax strategies of a sitting president — information that has long been seen as central to the knowledge that voters should have about the leader of our government and the candidates for that high office.”
Salvador Rizzo, Former IRS contractor pleads guilty to leaking Trump’s tax returns, 10/12/2023 Washington Post
Referring to this guy as a whistleblower is a mischaracterization. He was not revealing wrongdoing, illegal misconduct, corruption or similar but rather releasing protected, confidential tax data to serve his own personal or political interests. That sort of justification demeans legitimate whistleblowers and leads to a narrative that journalists and media organizations just want to publish stuff that serves their agendas, sells newspapers, or attracts eyeballs. It may be that presidents’ and presidential candidates’ tax returns should be released to the public. If so, it needs to be done by enacting a law that requires it.
New tax gap numbers
On October 12th, the IRS released new tax gap numbers (summary and full report) that showed “a significant jump from previous estimates.” According to the release:
The tax year 2020 and 2021 tax gap projections translate to about 85% of taxes paid voluntarily and on time, which is in line with recent levels. After IRS compliance efforts are factored in, the projected share of taxes eventually paid is 86.3% for tax year 2021, down slightly from the 87.0% for tax years 2014-2016. This drop in compliance does not factor in any changes in compliance behavior; instead, it is due to changes in the types of income and how that income is reported to the IRS.
IRS, Tax Gap Estimates for Tax Years 2014-2016 (10/12/2023)
These are the first estimates of annual amounts and IRS also announced it will begin releasing yearly estimates. Both seem to me to be good moves to focus more attention on the gap and to provide more detail.
The estimates are based on audits from 2014-16 and, thus, should reflect the first effects of congressional starvation of the IRS’s budget that began in FY 2012. The tax gap is growing faster than the tax base or the economy. Since the estimates assume constant compliance rates, the growing gap estimates are likely caused by changes in the composition of income – e.g., income with lower compliance rates (e.g., more business income relative to wages) – and reduced auditing and enforcement.
Table 1 in the full report (p. 10) shows that the Gross Tax Gap grew by 38.7%, while Enforced and Late Payments slightly declined (-0.1%). The gross tax gap is used to compute the Voluntary Compliance Rate (i.e., what taxpayers report on their own), while the Enforced and Late Payments reflect IRS enforcement efforts (amounts attributed to audits, examinations, etc.). I don’t know how the estimated growth in enforcement are made, so it is hard to know how much is due to reduced IRS resources, rather than more income with lower compliance rates even after IRS enforcement efforts. (This is how the report cryptically describes the methodology: “Estimate for a given type of tax & tax year is the sum of late payments to date plus a projection of future late payments based on payment patterns observed for earlier tax years” Table 8, p. 20.) In any case, the growth in the net tax gap (i.e., the headline gap everyone focuses on) is attributable to the enforcement amount not growing at pace with the tax base. That follows necessarily (it seems to me anyway) from the assumption of constant compliance rates. One inclined to be suspicious of the IRS would suspect a thumb on scale might be involved.
Tax compliance funding fight from yesteryear
On a tangential but related matter, Joe Thorndike, has a piece in Tax Notes, Tax History: Treasury Promised a 20-1 Return on Tax Enforcement, but Congress Slashed Funding Anyway (9/25/2023) (no paywall) that describes the political fight over BIR (the IRS predecessor) funding waged by the 1947 Republican Congress with the Truman administration. I was completely unaware of this history and found it interesting and revealing. Thorndike’s account even includes a quote from a Minneapolis Star editorial opposing the cut.
I’m sure he wrote the piece and it is interesting because of the parallels to the current fight between the Biden administration and Congressional Republicans over IRS funding. Thorndike ends the piece with the observation that “In Washington, some debates — even ones surrounded by a sea of relevant data — just go on forever.” He casts it as a debate over the return on money appropriated for tax enforcement, which is what it was. The current debate is nothing like that.
What struck me on reading the piece was how the substance of the 1947 debate, as portrayed by Thorndike, starkly contrasts with the current debate over increased IRS funding.
The Republicans had taken over Congress in the 1946 mid-term election. It was their first control post-New Deal and they were determined to cut federal spending. The BIR’s budget had greatly expanded during WWII when the income tax was expanded from applying only to the affluent to nearly everyone with any reasonable amount of income, a 6X increase in the number of returns. The agency’s budget had similarly grown. The House’s budget cut the agency’s $208 million request by $30 million.
The Truman administration responded by saying that would cause a $600 million reduction in revenue (the 20:1 ratio in Thorndike’s title). And that all the cuts would come from enforcement. The House’s response – diametrically opposite to the current debate over increased IRS funding – is described by Thorndike as follows:
GOP lawmakers resented the BIR’s effort to strong-arm the committee with catastrophic projections about lost revenue. And they instructed the BIR to leave enforcement funding intact. “There is a specific item in the report that the committee will not countenance a reduction in the enforcement personnel,” noted Rep. Everett Dirksen, R-Ill. “We want them to get out of Washington some of these people in the administrative offices who are falling all over themselves.”
Joe Thorndike, Tax History: Treasury Promised a 20-1 Return on Tax Enforcement, but Congress Slashed Funding Anyway Tax Notes (9/25/2023) [emphasis added].
Thus, they explicitly prohibited cutting auditing and enforcement to preserve revenue collections. Contrast that with the current GOP falsely claiming Biden and Democrats funded 87,000 new gun-toting agents who will appear at your business or home to make sure you pay up. Both parties are still on the same sides of the debate, but the substance has shifted seismically. The 1940s Republicans obviously thought preserving tax collections was crucial, making the return on investment relevant. I may have missed it, but I have detected no concerns on that front by the 2023 congressional Republicans. The 1947 debate appears sedate and rational compared to today’s, animated as it is by extreme claims and outright misinformation.
To finish the story, the House’s proposed cuts were about halved in a final compromise. But that was not before the administration sent out layoff notices to BIR employees and encouraged them to lobby Congress against the cuts and Truman decrying the cuts when he signed the bill.
Hunter Biden’s taxes
Disclaimer: this is largely about tax compliance and enforcement, not Hunter or his taxes.
Senator Wyden, chair of the Senate Finance Committee, sent a letter to IRS Commissioner Werfal (with a press release, of course) urging the Service to go after high-income non-filers. I assume the exercise had two purposes – (1) to counter the GOP drumbeat on Hunter Biden’s tax problems and (2) to shore up the case for IRS funding, while making the GOP look hypocritical (typically an easy lift). But the disclosures in the letter are eye-popping and somewhat (to me anyway) inexplicable.
The committee made a request to the IRS for information on high-income non-filers. They defined high-income non-filers as ones who reported $200,000 in AGI for one tax year between 2017 and 2021 – note that is half what the Biden Administration considers high-income under its goofy tax pledge – and had multiple years in which they did not file returns between 2015 and 2021. Wyden’s letter describes the response the Committee got as “identifying staggering levels of noncompliance and criminality by high-income non-filers.” That is hyperbolic, but the numbers did surprise me:
There were 981 high income non-filers in this population with AGI of at least $1 million. These taxpayers owed $34,277,321,852 in total unpaid assessments (tax, penalties, and interest) as of May 2023. There were 58 high income non-filers in this population with AGI of at least $10 million. These taxpayers owed $16,685,980,639 in total unpaid assessments (tax, penalties, and interest) as of May 2023.
Ron Wyden letter to Commissioner Werfel (9/28/2023), pp. 1 – 2, fn 2.
So, 981 filers reported $1 million or more in AGI in one year of the period and failed to file returns in two years! I would discount or ignore the dollar amounts owed, because they must reflect SFRs constructed by the IRS, plus interest and penalties, all of which often inflate real tax liability, potentially by a lot. But if the $1 million AGI number reflects self-reported income on filed tax returns (rather than something constructed by the IRS), it shocks me that almost a thousand of those taxpayers would skip filing two or more tax returns. Since failing to file does not trigger the statute of limitations, the IRS has unlimited time to come after you. If your reported income was that high, I can’t imagine a well-advised taxpayer (as most of these taxpayers must be) would think they could somehow avoid IRS scrutiny. Of course, in a few cases they may have insufficient income to generate a liability (typically because of business losses) and so there is no urgency to file. But you typically will still file, often to claim carryover losses and get a refund of prior year tax or to establish carryforward losses for the future returns.
It’s a mystery to me. Tax compliance and filing can’t really be this bad, can they? It does suggest that DOJ was not going easy on Hunter by allowing him to plead to a misdemeanor, and that he is more likely getting the book thrown at him now. I don’t feel much sympathy for him (beyond his obvious mental health issues), just to be clear.
In a recent press release, the IRS says it is on the case of pursuing these non-filers, as Wyden requests:
The IRS has been ramping up efforts to pursue high-income, high-wealth individuals who have either not filed their taxes or failed to pay recognized tax debt. These efforts are concentrated among taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt. * * * As announced in September, the IRS has begun contacting about 1,600 new taxpayers in this category that owe hundreds of millions of dollars in taxes.
The IRS has now collected $122 million dollars in 100 of these already assigned 1,600 cases.
IR-2023-194, Oct. 20, 2023
Update 11/9/2023. Tax Notes has a story, Behind the Scenes of the IRS’s Crackdown on Wealthy Taxpayers (11/6/2023) (no paywall), that interviewed practitioners on reasons for high-income taxpayers not filing:
“It was definitely a mixed bag,” said Gerald W. Kelly of Kelly Dorsey PC, a former revenue officer. The most common excuse among these high-income taxpayers was simply that they were living above their means, he said, explaining that while they might have earned hundreds of thousands of dollars in income, their lifestyle expenses had increased commensurately, and they ended up spending all of it to maintain that.
Another common scenario is a taxpayer who doesn’t file or pay one year. They may think what they’ve done is so bad that if they file the next year, it’s going to bring that mistake to the IRS’s attention, Kelly said. Then they assume the worst: that the IRS will send them to prison or seize all their assets if it finds out, so they bury their head in the sand and stop complying altogether, hoping the IRS won’t notice.
High-income taxpayers also might not file returns or pay their taxes because of a major life event like an illness, according to Robert A. McKenzie of Saul Ewing LLP. Then, instead of filing and paying, they may opt to prioritize maintaining their lifestyle, said McKenzie, another former revenue officer.
Another example is a taxpayer in the midst of a divorce, which can delay the tax preparation process because each spouse needs records from the other to complete their respective returns, McKenzie said. “Trying to get a joint return filed by a divorcing couple is not always the easiest thing in the world when they’re busy trying to — at least psychologically — kill each other,” he noted.
In still other cases, taxpayers with a lot of money just make bad financial decisions, McKenzie continued. “I’ve had clients fail to file because they knew they were facing a $400,000 liability, but they saw this opportunity to invest in something that they put their money in instead,” he said. “There are some very bad life choices by some of these people.”
Ultimately, all of these high-income taxpayers know that they’ve messed up. “I can’t think of one case I had where the taxpayer wasn’t aware of their obligation to file and pay every year,” Kelly said.
Ibid.
Collecting from them may not be as easy as one might think.
As an aside on Hunter Biden, WaPo has the backstory on the ups and downs of the prosecution, the whistleblower IRS agent, and more. The story has a lot of interesting details, including this curiosity as to how the tax case against him started (why is sex always involved?):
The investigation into Hunter Biden grew out of an international tax probe of an amateur online pornography company in Britain suspected of failing to pay taxes on payments to contractors, according to internal IRS documents shared with Congress.
One of those people was a suspected escort who bank records showed also received payments from Hunter Biden, according to case file documents. A review of Biden’s tax history showed he had failed to file federal tax returns for several years, prompting agents to open a separate investigation into his conduct.
Devlin Barrett and Jacqueline Alemany, Backroom battles between IRS agents, prosecutors in Hunter Biden tax case, Washington Post (10/3/2023).
The story appears to be a classic case of conflicting strong personalities, DOJ Tax Division bureaucratic machinations, and probably political considerations. A lethal combination in the current environment.
Direct file pilot states announced
The IRA legislation funded an IRS-provided free filing option. On October 17th, IRS announced that Arizona, California, Massachusetts and New York have been chosen as pilot states, meaning they will integrate their state taxes into the IRS-provided platform for 2024 filing season. Taxpayers in states without state income taxes may also be allowed to participate. States without their own government-provided filing option (e.g., Minnesota) were not eligible.
Assuming the pilot goes forward (not always a safe assumption), participation will be limited to:
[T]axpayers with certain types of income, credits and deductions – taxpayers with relatively simple returns. The IRS today announced it anticipates specific income types, such as wages on a Form W-2, and important tax credits, like the Earned Income Tax Credit and the Child Tax Credit, will be covered by the Direct File pilot.
IRS advances innovative Direct File project for 2024 tax season; free IRS-run pilot option projected to be available for eligible taxpayers in 13 states (10/17/2023)
The release has more detail about who’s eligible and the provisions covered. Here’s how it describes the option and how state taxes will be handled:
Direct File will be a mobile-friendly, interview-based service that will work as well on a mobile phone as it does on a laptop, tablet or desktop computer. The service will be available in English and Spanish for the pilot.
The Direct File pilot will be a limited, phased pilot. It will not be available to all eligible taxpayers when the IRS begins accepting tax returns. Because the IRS wants to make sure the program works effectively, Direct File will first be introduced to a small group of eligible taxpayers in filing season 2024. As the filing season progresses, more and more eligible taxpayers will be able to access the service to file their 2023 tax returns.
***
Direct File will cover only individual federal tax returns during the pilot. Also, Direct File will not prepare state returns. However, once a federal return is completed and filed, Direct File will guide taxpayers who want to file a state return to a state-supported tool that taxpayers can use to prepare and file a stand-alone state tax return. For the pilot in 2024, where taxpayers may have state or local tax obligations, the IRS will limit eligibility to states that are actively partnering with the IRS on the pilot.
Ibid.
IRS employees will provide, according to the release “technical support and provide basic clarification of tax law related to the tax scope of Direct File.”
I have always thought something like this is a good idea. Expecting people to prepare and file their own returns may have been reasonable in the past. But the complexity layered on the tax over the years and the reality that most already use software makes requiring taxpayers to shoulder that burden (i.e., to buy a commercial product to file their taxes) harder to justify. The Free File program has been revealed as essentially a sham or close to it with declining participation by commercial software providers. The two biggies, Intuit and HR Block, have withdrawn from it.
Will be interesting to see how this develops and what effect it has several fronts – e.g., inducing states to provide their own software and support, increased electronic filing (probably not much), and sales of commercial software (industry obviously thinks it will hurt them). I will stay tuned.
IRS delays pay-fors
The IRS has announced delays in information reporting for payments through payment platforms and in requiring higher income employees to make their “catchup” retirement contributions to Roth style plans. In both cases, this slightly undercuts intended revenue offsets to tax cuts or increased spending. I hope it does not permanently derail them, which is always the risk. There could be a tiny impact on state revenues for states with conforming income taxes.
When Congress passes tax cuts and new spending, it often includes tax provisions that are intended to offset some or all the spending or revenue loss. I think this is still required by budget rules, even though budget discipline in Congress evaporated long ago. Congressional jargon for them is a “pay-for” as in they are intended to pay for the tax reductions or new spending.
The tendency is to focus them on below-the-radar, narrow provisions that politicians perceive are politically acceptable or may go unnoticed. But that can mean that they are difficult to implement and cynically may not succeed in raising the full amount of their estimated revenue. In these two cases, they caused the IRS, which now is adequately funded, to throw up its hands and delaying implementation. Technically, the IRS probably does not have legal authority to do that, but nobody has legal standing to challenge the decision.
1099-K threshold
Back in December, the IRS announced that the much lower thresholds for 1099-K reporting that Congress enacted in 2021 would be delayed by one year until tax year 2023 (Notice 2023-10). This was a pay-for in the Democrats’ pandemic relief bill, the American Rescue Plan. The Joint Committee estimate (VIII.4) projects $8.4 billion in added collections from the item over the 10-year budget window. Delaying its effect by one year probably won’t equal exactly one-tenth, but close.
The expanded information reporting for payment platforms (technically Third-Party Settlement Organizations or TPSOs – e.g., Venmo, PayPal, and similar) was a dramatic increase – from 200 transactions aggregating at least $20,000 to trigger a Form 1099-K under prior law to a simple $600/year. The change was intended to increase compliance by businesses receiving these revenues, including gig workers like Uber Drivers, Airbnb hosts, and similar.
The prospect of ARP’s change generated a fair amount of media attention (almost hysteria in some quarters). The concern was that Venmo and Zelle payments where friends split restaurant checks, concert tickets and similar would generate 1099-Ks and tax compliance nightmares. (When that happens, the IRS advises attempting to get 1099-K corrected and if you can’t to make offsetting entries on the 1040. FAQ #8.) It’s unclear how the platforms will be able to sort out when payments are gifts, cost sharing, and similar rather than payments for selling goods and services. I could not find any IRS guidance on how they can do that (e.g., by allowing self-reporting by their users). These payments are likely a trivial share of the total payments covered, but an obvious source of friction.
The risk, of course, is that the delay will result in full repeal (something already being proposed in Congress by the usual suspects), rather than using it as an opportunity to implement a better system that generates fewer reporting errors.
In a classic case of having it both ways, GOP Senator Mike Crapo (R-Idaho), the ranking minority Finance Committee member, criticized the IRS for not following the statute in this case (of course the GOP opposes the provision altogether). According to Politico:
“One of the troubling concerns that I’ve seen is a recent trend that, from my perspective, is a willingness of the IRS and Treasury to ignore the plain language in enacted statutes when issuing regulatory guidance.”
“The IRS has simply disregarded statutory deadlines for implementing new Democrat-led provisions,” Crapo added.
To name but one example, a tax provision implemented by the American Rescue Plan that would have increased reporting for users of apps like Venmo, PayPal and Stubhub — and is unpopular among both Democrats and Republicans — was delayed for one year by the IRS in December 2022.
That law was supposed to go into effect for the 2023 tax season, but e-commerce and third-party marketplace companies lobbied heavily against it.
Benjamin Guggenheim, Why Treasury’s tax powers may be in GOP crosshairs, Politico (10/2/20223).
Roth catchup contributions
The Secure 2.0 Act, passed as part of the December 2022 budget deal, loosened taxation of retirement plans in a multiplicity of ways but most prominently by delaying the age at which RMDs must be claimed. (Yes, it also made some good changes that will help ordinary people struggling to fund adequate retirements through the savers match and auto enrollment changes.) With only a few exceptions RMD rules adversely affect those who have plenty saved for retirement and are funding inheritances, rather than retirements. There was no need to do that, especially the increase whose effective date was delayed until the first year outside the budget window.
One of the main pay-fors was to require more contributions to be made to Roth plans, including “catchup contributions” for employees with wages exceeding $145,000. That change was scheduled to go into effect next year, but the IRS delayed that effective date by two years as an “administrative transition period.” In the IRS’s words:
until taxable years beginning after December 31, 2025, (1) those catch-up contributions will be treated as satisfying the requirements * * * [to be made to Roth plans} even if the contributions are not designated as Roth contributions, and (2) a plan that does not provide for designated Roth contributions will be treated as satisfying the requirements * * *.
IRS Notice 2023-62, p. 6.
The Joint Committee revenue estimate does not separately break out this component, so I can’t tell how much revenue is at stake. It’s peanuts, for sure. The complexity of implementing a change like this is real – consider people with multiple jobs and how one employer should apply the dollar cap. So, I don’t doubt the need for more time.
Moreover, I have made the point before that the permanent revenue from switching to the Roth structure (aside from being bad policy IMO) is largely illusory. The Roth model requires tax to be paid up front (during the budget window) not during the retirement (often outside the budget window). The revenue loss appears to be made up only IF you look at the budget window and ignore the longrun. It is mainly being accelerated with little change on a permanent revenue basis. Of course, the time value of money – here interest payments on federal debt – is a real factor, especially now with the return of real interest costs of federal borrowing after accounting for the effects of inflation.
There is, however, a likely exception to that for these catchup contributions. These are higher contribution maximums that can only be made by older employees with high incomes (> $145k). They are often used in the years right before retirement to shift earnings into retirement when the retiree’s income and tax rate drop, a self-help income averaging provision. Requiring them to be made as Roth contributions thwarts that strategy and results in a real increase in revenue. The amounts are small, but the effect is likely heavily skewed to moderately high-income taxpayers (often below Biden’s definition, though).
Two observations about the IRS administratively undoing pay-fors
- There is a disconnect between the precision with which the process attempts to balance these minor tax cuts fiscally, while ignoring practical administrative reality of the pay-fors. The bigger disconnect is that Congress is careful in balancing these small changes, while using reconciliation to pass stuff like TCJA that adds massive amounts to the debt, which is growing faster than the economy when there is no macroeconomic (Keynesian style) justification for doing so.
- These temporary deferrals are trivial compared with the IRS’s questionable decision to allow PTEs to deduct entity-level state taxes. That blew a large hole in TCJA’s pay-fors. I have not seen an estimate, but it must be very large and will grow, especially if the SALT limit is made permanent without repealing or limiting it.
Paul Ryan speaks
Brookings and the Hamilton Project hosted an event that focused on the path forward when TCJA’s individual income tax cuts are scheduled to expire, Taking on tax: The past, present, and future (video replay, transcripts, etc.). Extending all the tax cuts will reduce revenues by something like $3 trillion over ten years, but the average voter obviously expects them to be extended and allowing them to expire would be cast politically as a tax increase (by Republicans and most of the general public), notwithstanding that is the what the law says. Official federal deficit and debt estimates assume they will expire. So, the debt estimates are unrealistically low as a practical and political matter. Biden’s budget calls for extending the tax cuts that apply to 98% of the population. The situation is a fiscal and political mess.
The first panel included Paul Ryan, the former Ways & Means chair and Speaker, who was a principal architect of TCJA and who (I assume) has a good a grip on what is politically feasible to pass, especially if Republican support is needed and probably even if it is not. Thus, I regard his comments as particularly interesting and maybe insightful for what the future holds. Here are a few excerpts (taken from the transcript rather than trusting my notes; the software used to create the transcript is really bad, so a lot of fixing was required, especially on acronyms but more broadly. For example, “corpse” ≠ the intended “corps” and similar. I did not note all of my fixes.):
Why TCJA’s corporate provisions were made permanent:
Kevin Brady and I decided that we would make permanent that which we thought for *** economic * * * and political reasons needed to be made permanent. The corporate rate, the territorial system. And we made temporary that which we thought had a better chance of withstanding extension under any conceivable political arrangement in the future.
Transcript p. 3.
My take: This was obvious to me: the corporate cuts were politically vulnerable, so they were made permanent. It’s a cynical use of a “temporary” tax cut to de facto put federal revenues and those who want to fund the federal government services at the current level in a vise. The corporate tax cuts would be unpopular (i.e., average Joe and Jane voters would be indifferent to them), so we made them permanent. The individual tax cuts would be hard for the Democrats to allow to expire because we’ll argue they’re raising your taxes – never mind that we enacted the law that causes them to expire. That’s clever and cynical and he is not ashamed to admit to it. I give him credit for honesty.
It also gives the lie to Ryan’s oft-expressed concern about the deficit or at least subordinates it to other parts of his agenda. Limiting the size of government is a higher priority than paying for the government we’re delivering. I’m old fashioned but that’s not conservative or transparent and uber cynical. But Ryan obviously believes in the hypothesis that low tax rates = growth. So, I’m sure that’s his rationalization. Probably because he spends too much time hobnobbing with GOP donors and starts to believe their cocktail chatter about tax rates holding back growth. If he spent more time with Warren Buffett and less with Rupert Murdoch and similar, his perspective might be different.
Regarding Moore, the SCOTUS case challenging the constitutionality of the repatriation tax as a mechanism to abort a wealth tax in utero:
I think [the Moore plaintiffs and their conservative backers are] misfiring on this one. I mean, a lot of the tax code would be unconstitutional if that thing prevailed. * * * So I think it’s a misguided challenge, in my opinion. * * * I’m not for a wealth tax, but I think if you use this as the argument [? it’s a constitutional prohibition, not an argument] to spike a wealth tax, you’re going to basically get rid of, I don’t know, a third of the tax code.
Transcript, p. 4.
My take: One-third of the tax code is hyperbole. I’m sure if the Court rules for the taxpayers, it will attempt to craft a narrow ruling that limits the collateral damage to both TCJA’s revenue offset and the Code, while preemptively killing wealth or other odious taxes according to their priors. But even a narrow ruling for the taxpayers will be bad news. That this case is on the docket at all is a consequence of the Republican selection process for SCOTUS nominees and their agenda to quickly rewrite constitutional law to align with their political philosophy.
There are echoes of Pollock, where the Court reached to rewrite constitutional law to be consistent with its laissez faire economic philosophy. The harm was temporary because in those days it was still practical to amend the constitution. See Professor Ackerman’s account (pp. 28 – 33) for the details (entire article is good).
In any case, the genie is out of the bottle and in SCOTUS’s hands and may become some sort of bogus history lesson on the meaning of “income” in the early 20th century America lexicon. We have got to hope that two of Roberts, Kavanaugh, and Coney-Barrett recognize the gravity of the matter and stay with the conventional wisdom that was taught in law school when they attended. I’m not feeling good about this but I’m a Cassandra.
Will QBI (20% deduction for business income) be extended:
199A [QBI’s code section] we’re going * * * to bring [the tax rate that] pass through [entities pay] up to, what, 44.6% when the C corps are staying at 21%? I don’t think that’s going to happen.
Transcript, p. 5.
My take: Ugh, this confirms what I had assumed. It is very bad news, since this is one of the worst features of TCJA. As various academics have pointed out, it’s complex, distortive, and violates both horizontal and vertical equity. It hard to find provisions that simultaneously violate the simplicity, efficiency, and equity principles. Ryan’s rate comparison is misleading as commentators have pointed out. It’s nominally for small businesses, making it highly attractive politically. (Disclosure: I personally benefit because of our investment holdings, which are far from being in “small” businesses.)
SALT deduction:
I would get rid of all of the SALT [deduction] now. I couldn’t. We kept [the threshold] at $10,000 because that’s where the votes were. We wanted to [eliminate the deduction]. It’s $10,000; that’s going away. That pays for a lot. I would do the KTC [likely child tax credit] with that personally[.]
Transcript, pp. 5-6.
My take: I think Ryan is saying a TCJA extension will restore the old SALT deduction. At least, I assume it’s the threshold that is going away, not the deduction. If he is right about that, it’s bad news for the deficit, since it would increase the revenue loss from extending the TCJA individual cuts as is. As Ryan notes, limiting the SALT deduction was one of TCJA’s biggest pay-fors.
The SALT deduction has been transformed into the standard GOP offset for proposed tax cuts, especially for tax cuts that the Democrats like such as the child tax credit. Mitt Romney and others have introduced bills to do that. Of course, media reports said Jim Jordan was willing to restore more deductibility (much higher thresholds) to get votes in his race to be Speaker. Politics is truly weird and torques policy.
How to fix the long-run federal fiscal problems?
Ryan thinks that the GOP’s new antipathy for big corporate America (e.g., Disney and other “woke” corporations) will not extend to tax policy (i.e., raising the corporate tax). So, a corporate tax increase is a non-starter if GOP support is required, in his view.
In terms of finding a fix for the long-run debt crisis, Ryan is still looking for a grand bargain:
I think tax reform is the way out of this. I can tell you the canyon we’re going into here in this conversation, the way out of this box canyon is tax reform. * * * I think you can get a higher revenue line [increase taxes] without sacrificing economic growth, but you’re not going to get the kind of distribution tables [progressivity] that I think this building [the liberals at Brookings] wants. And if you can drop it [concerns about regressivity], you drop that as a priority and focus on growth and revenue. I think you can get a decent tax reform system that that you could probably get some conservative buy in if and when it is brought together with entitlement reforms [benefit cuts to Social Security, Medicare, and Medicaid]. If there is ever going to be a grand bargain, it’s when we’re running into this debt crisis.
Transcript, pp. 8-9.
My take: This makes my head spin.
First, he’s living in a past that didn’t exist. The GOP Congress he was part of (i.e., in 2013) rejected a somewhat similar grand bargain with Obama. Okay, the Democrats in the Senate screwed things up a bit too, but Tea Partiers in the House were going to kill it no matter what, according to Boehner’s book. It’s hard for me to imagine the current GOP House (Jim Jordan, MTG, and the whole lot) even talking about something like this. No chance they’d ever agree to a tax increase.
Ryan is the eternal optimist. He’s convinced that the force of events can change the political dynamic. To me it seems like everything is going in the opposite direction. The debt growing faster than the economy is a silent and slow killer (like chronic high blood pressure or diabetes). My observation is that Congress is impelled to action only by obvious and immediate crises that the public gets. That’s not the debt. Constructed crises (e.g., the legal requirement to cut SS benefits when the trust fund can no longer full pay benefits) can easily be turned off shifting payment to the general fund, unless both parties agree that is unacceptable (as in the early 1980s). I doubt they will. Ryan obviously thinks otherwise. I guess successful politicians (retired or not) need to be eternal optimists.
Second, his outline appears premised on a view that the Democrats highest priority is fiscal responsibility and would give Republicans their preferred policies (more regressive taxes and lower entitlement benefits) to get it. That presumptively fails. Why would Dems ever agree to that? So much for the supposed conservative party being a champion of fiscal responsibility. Instead, their negotiating position is to use the other side’s supposed concern about fiscal probity to extract policy concessions.
Third, he’s transparent about his willingness to increase regressivity. I get that he thinks that will stimulate growth by allowing lower tax rates on income, given his world view. The empirical support for that is next to nonexistent. His core Randian philosophy shines through (his professed concerns for the poor based on Catholic values, not so much). His preference for doing that is a border-adjusted carbon tax. (The border adjustment allows carbon emitting American businesses to compete in foreign markets without the drag of a US tax. That complicates administration and punts responsibility for the emissions to the nation in which the consumption occurs.) He also has not let go of TCJA’s Destination Based Cash Flow Tax, despite its swift death in 2017 because of business opposition. The US needs a broad-based consumption tax to fix the debt/deficit problems. Substituting the DBCFT for the corporate tax would have made doing that harder.
Bottom line, if something really needs to be done sooner rather than later about the debt, things don’t look good. Ryan is (relative to the Republicans in Congress now) thoughtful and reasonable. Truly depressing for anyone who thinks we need to align long-run revenues more with entitlement spending commitments.
SALT Speak - Joel Michael's Blog 