In a previous article, we discussed the Child Tax Credit and the major enhancements to that credit through the American Rescue Plan. This plan not only provided funding for this credit it also laid out the spending of all together $1.9 Trillion towards the recovery of America.
Today I am going to discuss the next part of the “Build Back Better Agenda”. I will start by laying out the provisions of this next step “The American Jobs Plan”. Going through all of this you will see that this next package like the first is a plan for major spending. So, I will go into detail as to how they plan to pay for it by beefing up the IRS and their collections and audit process.
What is The American Jobs Plan?
The American Jobs Plan is focused on upgrading and repairing America’s physical infrastructure, investing in manufacturing, research and development, and expanding long term-health care services. The proposal calls for over $2 trillion to rebuild the nation’s crumbling infrastructure including roads bridges and airports, as well as spending on care infrastructure with a focus on long-term care for the elderly and disabled. $1 Trillion of this plan will be spent on families and education while also providing $800 billion in tax cuts to promote economic prosperity and security. This new proposal is designed to promote longer-term economic recovery and keep the United States competitive while responding to the economic devastation from the coronavirus pandemic and the climate crisis.
CBSNEWS.com has nicely laid out a breakdown of the spending proposed through the American Families Plan:
- $200 billion for universal pre-K for all 3- and 4-year-olds
- $225 billion for childcare including subsidies for low-and middle-income families and money for providers and workers
- More than $100 billion for two years of free community college for all
- $225 billion for a national paid family and medical leave program
- Extends the expanded Child Tax Credit, which means families will receive monthly checks totaling $3,600 for children under six and $3,000 for kids ages six through 17 through 2025
- Makes the increased Child and Dependent Care Tax Credit as well as the Earned Income Tax Credit permanent
- Make recently expanded premium subsidies under the Affordable Care Act permanent
- Also includes scholarships for teachers, increased Pell Grants, expanded nutrition programs.
Where Will the Money Come From?
With all this spending the major question is how it all is going to be paid for. We already have a growing deficit problem. Along with the proposal, there is a proposal for some major tax changes. They are promising not to have any tax increases on people making less than $400,000. They are proposing rolling back the drop in the top tax bracket from Donald Trump’s 2017 Tax Cuts. This would put the highest tax bracket back to 39.6% from 37%. It is also calling for Capital Gains to be taxed as regular income paying the same 39.6% tax rate up from the 20% paid now. It will also close common loopholes used to avoid paying taxes on different types of gains.
The proposal is also calling for corporate tax increases to help pay for the plan. In the plan, the corporate tax rate would rise from 21% to 28%. The president also proposed expanding payroll taxes for high earners to help shore up the finances of the Social Security program and eliminating the “step-up” in basis on assets in an estate- a tax loophole that means unrealized capital gains held at death are never taxed.
How the IRS Is Involved
The president’s proposal is also calling for a major investment in the IRS that should produce major returns by increasing their ability to collect. Over the past 25 years, there has been a major decrease in funding allocated to the IRS for audits, exams, and collections. In the past 10 years, it has declined by almost 30%. The IRS has lost 17,436 positions working in enforcement and collections in the last 10 years.
Consequently, between 2010 & 2018 the amount of individual tax examinations has decreased by 46% and examinations in corporate income tax returns has dropped by 37%. This has resulted in what they call a tax gap. This is the difference between what taxpayers owe and what they pay on time.
According to IRS figures as an example, the tax gap for 2011-2013 was approximately $381 billion. As cited in an article on quart.com by Charles Rettig because of new sources of income like cryptocurrency the tax gap is growing year by year. “It would not be outlandish that the actual tax gap could approach and possibly exceed, $1 trillion a year,” Ruttig said.
Collecting a portion of this missed income could pay for a large part of the proposed plan. The president is calling for an $80 Billion investment into the IRS and thinks this can provide a return of $700 billion more collected over the next 10 years. In the recent “skinny budget” the White House requested $13.2 Billion a 10.4% increase to allow oversight of wealthy and corporate tax returns. It also already requested an additional $417 million for tax enforcement.
This is just a start. Over the next decade, the proposal would provide steady funding for the IRS after years of declining budgets which have forced steep cuts in employees conducting audits, examinations, and collecting money. It will also provide security over time so it makes sense to train these employees to ramp up collection effort and conduct more audits and examinations without the fear that future lawmakers will pull away from the funding. This allocation of $80 Billion should all the IRS to increase productivity in these departments by about 15% a year.
Possible Upcoming Changes to How Income is Reported
Another major change within the IRS would also change in how income is being reported. A significant problem at this point is tax evasion and the underreporting of income. Studies show that more than 20% of the income of the top 1% goes unreported. People and businesses avoid reporting income in many ways. Some by accepting cash, use of cryptocurrency, and offshore accounts.
One major step proposed to curb some of this underreporting of income would be requiring financial institutions to report more than just taxpayers’ interest earned, capital gains, and losses. Banks and other financial institutions would be required to report money coming in and going out of your accounts. This would give IRS information on all your accounts whether you earned income from that account or not. This would obviously require a large effort from the financial institutions, but it would eliminate a huge blind spot that the IRS is currently dealing with.
Right now, a lot of self-employed individuals are on the honor system, unlike W-2 earners whose employers report their income to the IRS. The lack of information that the IRS has now makes it easy for self-employed individuals to lie about gross receipts and gross revenue to the business. Self-employed taxpayers who take outlandish write-offs and expense deductions are likely to be caught in an audit but the underreporting of income is much more difficult to track. Allowing the IRS to see how much was deposited and how much was withdrawn would help regulate the income being reported.
With these major changes possibly coming to the IRS and their enforced collections and will be so important that you hire the correct tax professional. There is a provision in the plan that would give the IRS more rights to regulate paid tax preparers. There are certain types of tax preparers that are unregulated cannot really provide accurate tax assistance. These tax preparers make costly mistakes that subject their clients to costly audits and sometimes even intentionally defrauding taxpayers for their benefit. The president’s plan calls for giving the IRS the legal authority to implement safeguards in the tax preparation industry. It would also provide stiffer penalties for unscrupulous preparers who fail to identify themselves on tax returns and defraud taxpayers.
With all this said it is so important for taxpayers to know who they are hiring. There are two levels of licensing that one can hire to ensure they have the correct representation. They are the Enrolled Agent and the CPA (Certified Public Accountant)
In conclusion, the President feels his new proposal is designed to promote longer-term economic recovery and keep the United States competitive while responding to the devastation from the coronavirus pandemic and the climate crisis. The plan would not only provide many much-needed services and rebuild a depleted and aging infrastructure, but it would also provide much-needed jobs. With these adjustments in tax law and ramping up of the IRS and their collection efforts, this plan could pay for itself. Of course, the next step is trying to get something like this approved. Republicans are already putting up major roadblocks on the possibility of them voting for any tax hikes whatsoever to fund this plan. They are also looking at a much lower dollar figure closer to the range of $600 Billion to $800 billion more focused on just infrastructure.
With a thin margin between republicans and democrats, the president would have every democrat on board for them to steamroll this plan through Congress as they did with the previous stimulus plan.