Friday, November 19, 2021

Biden’s Conduct Proves the Limits of Tax Enforcement

The White House fears that an impending Congressional Budget Office analysis will say Democrats’ spending bill would increase federal deficits. The dispute seems unsurprising, given the myriad budgetary gimmicks in the bill—but not for the reasons one might expect.

Ignore for a moment the fact that the bill contains ten years of tax increases to pay for a few years’ of spending that Democrats later hope to extend, meaning that independent budget analysts have pegged the bill’s true ten-year cost not at $1.75 trillion but nearer to $5 trillion. Ignore too the fact that front-loading the bill’s spending means it will almost certainly increase federal deficits in the short-term, exacerbating inflation at a time price increases are already at 30-year highs.

Instead, the proximate dispute with CBO concerns whether an increase in tax enforcement will yield as much revenue as Treasury claims. On that front, one of the biggest arguments against the Biden administration’s position comes via Joe Biden himself.

Dueling Tax Estimates

The New York Times reported Monday that “the White House has begun bracing lawmakers for a disappointing estimate” from CBO, and is “urging lawmakers to disregard the budget office assessment, saying it is being overly conservative in its calculations.” While administration officials say additional tax enforcement will generate $400 billion in new revenue, CBO Director Philip Swagel on Monday said he stood by the agency’s September estimate that enhanced enforcement authority will net roughly $120 billion.

The difference between the lower and higher revenue figures could determine whether the bill gets scored as a budget-saver or budget-buster. Treasury has therefore come out swinging at CBO, with Assistant Treasury Secretary Ben Harris calling the office’s methodology “patently absurd” in an interview with the Times.

Whither IRS Enforcement?

But given his own boss’ conduct, Mr. Harris doth protest too much on tax enforcement. After leaving the vice presidency in early 2017, Joe Biden and his wife Jill created two S-corporations, and characterized most of their book and speech earnings as profits from those corporations rather than taxable wages.

These maneuvers allowed the Bidens to dodge nearly $517,000 in payroll taxes. The Tax Policy Center called the Bidens’ actions “pretty aggressive.” And a recent Congressional Research Service report outlined several instances in which federal courts agreed with the IRS in requiring S-corporations to pay back taxes—all of which arguably applied to the Bidens.

Yet despite the Bidens’ public release of their returns, and coverage of the irregularities surrounding them, no news has yet emerged of an IRS audit. Why?

Political bias provides one possible explanation, given past IRS harassment of conservative non-profit organizations, and unanswered questions regarding the leak of tax returns to the liberal activist site ProPublica. The Times’ reporting on Donald Trump’s taxes last year confirmed the IRS had initiated audits of his returns well before he attained the presidency, so it’s reasonable to ask why Biden’s pre-presidential returns have not come under similar scrutiny.

Yet a more basic explanation comes from the fact that people like the Bidens can hire high-priced lawyers to defend their actions. If audited, Biden would likely engage experts to validate taking a salary of only $145,833 in 2017, against more than $10 million in corporate profits, as “reasonable compensation” in line with IRS guidelines.

He might offer a low-ball amount to settle a potential audit quickly, but could also engage the IRS in years of costly litigation. After all, if the public release of his returns did not compel Biden to use less aggressive tax strategies, an IRS audit would have little effect.

Ironically, the bill in question would close the tax loophole the Bidens spent the past four years exploiting. Treasury says the change would reform a system that is “unfair” and “provides tax planning opportunities for business owners, particularly those with high incomes, to avoid paying their fair share of taxes.”

Worst of Both Worlds

Therein lies the problem with that particular tax increase, the proposals for increased IRS enforcement authority, and the Democratic bill in general. Honest individuals and struggling small businesses, who try hard to pay their obligations to the federal government, will face higher taxes, new regulatory burdens, and a greater potential for IRS harassment. But those who have the money and tools to game the system—the Joe Bidens of the world—will carry on much as before.

White House claims lawmakers should ignore a CBO analysis showing the spending bill increases the deficit, because CBO underestimates revenue gains from tax enforcement, have an easy retort: How can Biden’s IRS get other “rich” people to “pay their fair share” if Biden himself won’t pay his?

This post was originally published at The Federalist.