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The Budget Deal Raises Taxes On Rich People, Kind Of

The Huffington Post The Huffington Post 27/10/2015 Zach Carter
ATHENA IMAGE © Bill Clark via Getty Images ATHENA IMAGE

WASHINGTON -- Although outgoing House Speaker John Boehner may be reluctant to acknowledge it, the latest budget deal between Congress and the White House includes a provision that will require wealthy Americans to turn over more money to the IRS.

Boehner claimed Tuesday that the deal doesn't increase taxes. Whether that's an accurate statement depends on how one defines the term "tax increase." The federal government has three basic ways it can increase its tax revenues: raise tax rates, eliminate loopholes and deductions, or ramp up IRS enforcement of existing tax laws. The latest budget deal took what's behind Door No. 3.

The proposed deal is expected to generate $11 billion in new federal revenue from what both sides are calling "tax compliance" measures, including $9 billion from new auditing standards for hedge funds, law firms and other business partnerships. In plain English, that means the IRS is going to be getting more money by improving its tax collection policies for rich people.

It's an open secret in Washington that a lot of wealthy people don't pay all of the taxes they owe. But figuring out who is taking advantage of perfectly legal tax deductions and who is illegally dodging payments can be a difficult and costly endeavor. It's particularly hard when people have their money tied up in a large business partnership, because the existing rules for auditing partnerships are old and designed for relatively simple businesses.

 

Under existing law, if the IRS thinks a firm has been skimping on its payments, it can't just look at a single tax filing for the business and calculate what it owes; it has to audit the individual tax returns of every single partner involved in the business. That's not a big deal for a local bakery or flower shop with two or three partners. But many far more complex operations -- hedge funds, law firms and other things that pay rich people lots of money -- can have hundreds or even thousands of partners, making it extremely difficult for the IRS to show that money is being held up.

A 2014 GAO report found that, as of 2011, there were more than 10,000 businesses with at least 100 partners, and more than 500 businesses with at least 100,000 partners. And the large partnership structure is particularly appealing for many firms precisely because it is harder to track tax chicanery than if the company were simply organized as a corporation, which can be audited at the corporate level. The number of large partnerships more than tripled from 2002 to 2011.

The change included in the budget would eliminate those more complicated auditing rules for partnerships and allow the IRS to audit them once, at the partnership level, without fussing with hundreds or thousands of other tax returns.

Regardless of whether one would define $9 billion in new money from hedge funders and other well-heeled professionals over the next decade as a tax "increase," it isn't exactly an aggressive maneuver. Raising the tax rate on the wealthiest 0.1 percent of taxpayers by 5 percentage points, for instance, would bring in $55 billion in the first year alone, according to The New York Times.

Zach Carter is The Huffington Post's senior political economy reporter and a co-host of the HuffPost Politics podcast, "So That Happened." Listen to the latest episode here: 

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