Democrats’ plan: Tax the rich, watch the rest?

President Joe Biden and Treasury Secretary Janet Yellen have several ideas for how to increase the government’s revenue without raising taxes, but they all boil down to this: You have to spend money to make money.

According to the Congressional Budget Office, spending another $80 billion on the IRS over the next decade would net an extra $200 billion in revenue by equipping the agency to spot tax cheats more efficiently. If included in the budget reconciliation package being negotiated in Congress, the $80 billion would fund several changes, one of which would give the IRS information on bank accounts with more than $600.

The Treasury estimates Americans underpay their taxes by about $600 billion a year, or about 15 percent of total taxes owed. The “tax gap” mostly springs from income sources that the IRS struggles to verify such as rental income or certain business revenue. Some wealthy taxpayers hire accountants and lawyers to help them avoid taxes, and the IRS says it lacks resources to complete their complex audits.

The extra $80 billion in funding would go to improving the IRS’s computing systems, enforcement, and taxpayer services. Alex Muresianu, a policy analyst at the Tax Foundation, said updating the IRS’s information technology, for instance by getting software that can flag high-fraud risk tax returns for an audit, could make enforcement more efficient. The extra money is enough to more than double the agency’s staff, according to the Congressional Budget Office, after years of cuts. Hiring more agents could allow the IRS to complete more complex audits.

Every president since Ronald Reagan has tried to close the tax gap, according to the Committee for a Responsible Federal Budget. Muresianu noted that increasing audits overall will inevitably increase audits for those who follow the law, creating an extra burden for taxpayers. Plus, paying for more enforcement eventually produces diminishing returns. “There comes a point where the cost of enforcement outweighs the additional revenue,” Muresianu said. “I don’t think we’re at that point yet, but there always comes a point.”

Another proposal has generated much more controversy. Yellen has pushed lawmakers to require banks to report yearly balance and transaction information for accounts that have at least $600 or $600 of total transactions. The measure would not track individual transactions, and the Treasury estimates it would help the IRS close $460 billion of the tax gap over the next decade.

Banks quickly blasted the measure as a reporting burden. Tax Notes contributing editor Marie Sapirie argued the policy would collect information indiscriminately, drowning the IRS in new data without a clear plan for sorting it and using it to target tax evaders. And, Sapirie pointed out, the IRS has failed to protect sensitive information in the past, making this bid to collect new data a potential security risk for taxpayers. Former IRS Commissioner Charles Rossotti suggested instead that the IRS collect deposit and withdrawal reports for taxpayers with more than $25,000 in business income not reported by third parties.

After the uproar over the $600 account oversight idea, House Democrats left it off a list of proposed policy changes in September. But House Speaker Nancy Pelosi, D-Calif., on Tuesday defended the plan, and Democrats have considered instead adding oversight for accounts with more than $10,000. Whether that version of the policy makes the final version of the reconciliation bill depends on the next weeks of negotiations in Congress.