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Centrist Democrats Won’t Even Let Biden Crack Down on Tax Cheats

Intelligencer logo Intelligencer 9/17/2021 Jonathan Chait
icon: Intelligencer; Photo: Anna Moneymaker/Getty Images © Intelligencer; Photo: Anna Moneymaker/Getty Images Intelligencer; Photo: Anna Moneymaker/Getty Images

Joe Biden began with a perfect plan for his domestic agenda: He would create popular new health-care, education, and child-care programs for broad swaths of the public and finance them by making the wealthy pay for it.

The flaw in the plan is that the wealthy don’t want to have less money. Swarms of lobbyists set loose in Washington have eaten Biden’s proposals alive. His plan to end the notorious “angel of death” loophole allowing capital gains to escape any tax? Dead. His proposals to allow the government to negotiate prescription drug costs, saving taxpayers and consumers hundreds of billions of dollars? Eviscerated.

Perhaps most amazingly of all, even his plan to crack down on wealthy tax cheats is hanging on for dear life in Congress. Over the next decade, because of rampant tax cheating and lax enforcement, the federal government will collect roughly roughly $7 trillion less in revenue than taxpayers owe. The Biden administration conservatively believes it can reduce that gap by about one-tenth, collecting an additional $700 billion. Of that $700 billion, the majority, $460 billion, would come from new requirements that banks report to the IRS any transaction worth $600 or more.

The point of the requirements is to make it harder for wealthy individuals to hide their untaxed income flows. (Sometimes they do so by breaking up the payments into small chunks.) If the IRS has visibility into these funds, it can more easily track income that wealthy people are refusing to report. But this requirement has irritated small banks, which don’t want to have more paperwork on their hands.

Those banks have launched a fierce and apparently effective lobbying campaign. The arguments being used by the banks are borderline frivolous. A letter to Congress from the Independent Community Bankers of America claims, “Our primary concern is that the proposal would undermine the critical relationship of trust we foster within the communities we serve — communities prone to distrust of institutions and government agencies,” proceeding to warn that unbanked low-income minorities would somehow be harmed.

The administration’s defenders point out that this critique is essentially backward. Biden’s plan is to reform the IRS to hire more agents to help low-income people answer their tax questions, while cracking down on rich tax cheats. Since wealthy people tend to be white, and poor people are disproportionately nonwhite, raising revenue from the rich to fund programs for the non-rich is obviously helpful, not harmful, for minorities.

One way to think about the perversity of the opposition is to imagine Biden’s plan in reverse. Suppose the reporting requirement already existed. And then imagine the president wanted to eliminate it as part of a plan to help encourage poor people to use banks. Eliminating the requirement would cost barely half a trillion in revenue over a decade, so to pay for that change, the government would have to raise taxes on families or cut funds from community college or Medicare, etc.

A plan like that would be completely dead on arrival. Not even Republicans would be willing to support it. That this trade-off — $460 billion in lower revenue and social spending in order to keep bank reporting requirements lax — seems sensible to some Democrats in Congress is a measure of the extreme status quo bias in the system.

The ability of vested interests to protect the status quo, however indefensible the status quo may be, has made it almost trivially easy for lobbyists to pick off Biden’s reforms. Since any one Democratic Senator or four House Democrats can block anything, lobbyists can venue-shop the entire Democratic caucus for a sympathetic or pliable ally. And so while it’s easy for Biden to design a trillion or more worth of budget savings that pass muster from economists or other experts, in practice every one of those dollars has to run a gauntlet of special-interest opposition.

And when some Democrats are in the pocket of Big Pharma, others sympathetic to wealthy heirs, and others taking seriously the concerns of their local banks, they’re going to run out of money fast. Functionally, that means ditching most of Biden’s social agenda — programs like free community college, child care, and tax cuts for families — in favor of preserving advantages that could never be passed into law if they didn’t already exist.

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