One of President Biden’s worst — and most unpopular — ideas is to double the size of the Internal Revenue Service by adding $80 billion to its budget and hiring as many as 85,000 more auditors and agents. The White House predicts this will collect hundreds of billions of dollars in alleged unpaid taxes.
More tax snoops. More audits. This sounds like as much fun as a proctology exam. It’s the kind of proposal only tax accountants, tax lawyers and D.C. lobbyists could love.
Ironically, this proposal comes smack in the middle of the latest scandal at the IRS, with agents illegally turning over private tax return data of millionaires and billionaires to the media. And that comes in the shadows of the Lois Lerner affair during the Obama years, when the agency targeted the tax returns of conservative organizations and donors who happened to oppose Obama’s policies.
What makes the IRS expansion doubly foolish is that the $2.3 trillion Biden tax plan would not just raise personal income, corporate, estate tax and payroll tax rates, but it would add more loopholes and tax shelters to the 30,000-page tax code.
The Biden team keeps referring to this as “tax reform,” but it is the opposite of that. True tax reform should be based on two principles that not long ago were universally accepted by Democrats and Republicans. First, keep tax rates as low as possible to reduce the economic distortions and disincentives of the tax code. Second, broaden the tax base by eliminating the hundreds of special-interest loopholes to make the tax system fairer.
The two of us have long endorsed a flat tax of around 17 percent with minimal special-interest deductions — and, of course, one of us famously ran for president of the United States on that platform. This approach would not just increase the efficiency of the tax code but could increase tax collections and reduce the tax gap.
Almost every IRS commissioner for the last 50 years has confirmed that our income tax system can only function with broad voluntary compliance — unless Biden wants to put an IRS agent in every boardroom and home office in America. Americans are more likely to pay up when they perceive the system is simple, fair and uniformly applied.
Voluntary compliance also rises dramatically when tax rates are lower. Our friend and colleague, Arthur Laffer, has shown that lower tax rates over many decades have corresponded with much higher amounts of adjusted gross income on tax forms. The best example of this is what happened after the bipartisan 1986 tax reform that lowered tax rates across the board: The highest income tax rate fell from 50 percent down to 28 percent, but income tax revenues soared by one-third, from $349 billion in 1986 to $467 billion by 1990, because of fewer loopholes and an improved economy.
Ditto for the Trump tax cuts. Andy Puzder examined IRS tax return data and found that the combination of lower tax rates (especially for small businesses, down from 40 percent to 29 percent) and the closing of loopholes, such as the state and local tax deduction, led to an astonishing $800 billion rise in taxable income declared on tax returns.
How many tens of thousands of tax agents would Biden have to hire to duplicate those results?
It’s very likely that the Biden tax proposal, which raises the federal tax rate from about 40 percent today to a new 55 percent tax rate, (a new 15 percent payroll tax plus a 40 percent income tax on incomes of more than $400,000) would reduce taxable income. Here is why: The incentive to invest in legal tax avoidance through loopholes is proportionate to the tax rate. A $1 tax deduction under the Trump tax code is worth 40 cents. A tax deduction under the Biden proposal would be worth 57 cents.
This explains why every episode of higher “soak the rich” tax rates in the United States, dating back to the start of the income tax some 100 years ago, has led to furious and mostly successful lobbying by the rich and politically well-connected business interests to add more tax shelters to escape the reach of the tax man.
It’s already happening. More than a dozen House Democrats have told Biden they won’t vote for higher tax rates if the plan doesn’t include a new state and local tax deduction for high-tax states like New York and California. This would be the biggest carve-out for the top 1 percent of tax filers in American history and could, even with the higher tax rates, reduce the tax liability of millionaires and billionaires in their states.
So much for “socking it to the rich.”
Steve Forbes is chairman and editor-in-chief of Forbes.
Stephen Moore is a former Trump economic adviser and an economist with FreedomWorks. They are both co-founders of the Committee to Unleash Prosperity.