5 methods Joe Biden could use to implement his tax agenda (without a Senate majority)
One of Joe Biden’s campaign trail promises on his road to becoming the 46th President elect was a vow to raise taxes on the rich and large corporations so that they would pay their “fair share” — a comment that made some wealthy families game out various investment and estate planning scenarios. Now obviously that pledge was made on the prediction of Democrat “blue wave” election turnout where they kept the House of Representatives and established a newfound majority in the Senate, which would go along with tax hikes. But a week after the election happened, Biden became the projected winner in the presidential race. Yet Republican Senators fill 50 Senate seats and Democrats have 48 (including two independents who caucus with them). A Jan. 5 runoff elections for Georgia’s two spots.
And while the Democrats will keep the control of the House of Representatives, albeit in a smaller margin after several female GOP candidates flipped seats. With two Senate seats up for grabs, what does this mean for families thinking about their tax bill in a Biden administration era? According to an article published in Tax policy Center by Howard Gleckman, Congress could pass a revenue-neutral bill that pairs a tax cut aimed at low- and moderate-income households with modest tax increases on corporations and high-income individuals. Long shot? Perhaps. Impossible? No.
A few weeks ago a MarketWatch contributor Andrew Keshner published an article about the 5 ways Biden could still advance certain tax agendas. And even though there was not a clear Democratic sweep, some financial experts, think that some changes could come about such as increased scrutiny and audits on the rich, beefed up IRS rule changes and possible legislative proposals related to retirement savings and families with children. According to the Marketwatch article reporting, Caroline Bruckner, a tax professor at American University’s Kogod School of Business, “Sure, Biden might not get his laundry list of tax legislative priorities.” She went on to add “but there is so much he can do just with staffing change at the IRS and Treasury, and regulations that move the ball forward on his agenda.”
Now not every financial consultant is totally convinced that he will try to rip up the current tax rules, or they say he would be doing it at his own demise. Jason Cain, a chief wealth strategist with Boston Private, a bank with over $15 billion in assets under management spoke to MarketWatch and said he had many conversations with his wealthy clients over the summer and fall where he had to talk them “off the edge of the proverbial cliff.” At this point, “I think everybody’s taken a deep breath.” But he does expect more audits on top earners. Where his advice to his clients was “ in that type of environment, we sure as heck better not be pressed up at the line between black and white.” Which would mean going forward having tax planning and portfolios built on “established positions supported by regulations, IRS procedure or case interpretation,” Mr Cain said. “I don’t want my clients to be establishing precedent one way or another.”
So according to reporting from Marketwatch here five ways that Biden could still attempt to extract more tax dollars from big businesses and the well-off, while also leveraging the tax code to help households who are further down the income ladder, with their benefits and pitfalls.
Conducting more audits on wealthy taxpayers
(image credit:Crowe LLP)
So another way that the new Biden administration could try to bring in more revenue is conducting more audits on wealthy tax payers, the MarketWatch article reported. More audits for the rich are likely a way the new administration will try to bring in more money, observers told MarketWatch. As of 2019, the Internal Revenue Service has been scrutinizing fewer and fewer individual tax returns as audit rates continue to decline from a high point 10 years ago. According to research published by the former Obama Treasury Secretary Lawrence Summers, a high-profile economist, The government could have an extra $535 billion if audit rates return to their 2010 point and honed in on society’s 1%, according to one estimate. This past summer the IRS had announced plans to audit more wealthy taxpayers. A Forbes contributor also wrote about it. Crowe LLP also published a detailed article explaining new high-income initiative is a joint effort between the Small Business/Self-Employed Division (SB/SE) and the Large Business and International Division (LB&I). There is some overlap of this initiative with the existing global high-wealth program within LB&I, which began in 2009. But some experts feel that any future IRS staff build-ups aren’t just a matter of more funding. It takes time and training to implement changes.
The MarketWatch article references an example such as if someone was going to audit Earned Income Tax Credit EITC claims, they may need to have social skills to be able to talk with the taxpayers and understand family dynamics. Or if someone was going to examine a high-net-worth individual’s returns (meaning their business operations including any pass-through entities, trusts, retirement plans, and private foundations) they may need a background in forensic accounting and tax laws — and accounting firms will pay a lot to hire these types of people.
Nina Olson, the former National Taxpayer Advocate within the IRS. said that “one thing Biden can do is to start talking about public-service jobs, and have it look valuable that you do a stint in the IRS for a time. Yes, you take a hit on the salary, you have but the benefit of a government job.” If you are a wealthy household, it would be a good idea to have a tax planning strategy in place for the next few years to come. Because who knows what new tax laws could come after the 2022 midterm elections, the 2024 presidential race and the 2025 expiration of the Tax Cuts and Jobs Act.
Beefing up the staff to an IRS that has been hit with budget cuts
According to MarketWatch reporting another area that Biden can change to have a more aligned vision with his campaign promises: would be strengthening the IRS itself, a government agency that has acknowledged it’s been losing staff over the years. In the IRS Publication 5382, they noted that in fiscal year 2019, the IRS had 78,000 workers, which includes almost 1,600 more full-time workers than the year before, but that’s still “well below” staff levels in decades past. In 2018 Propolitica published an interesting article titled “How the IRS was gutted“,
Ms Olson noted that “You can pass all the policies you want. If the IRS can’t administer them, then you’ve just undermined your policy,” At the beginning of the Pandemic the IRS distributed more than 160 million stimulus checks after March’s $2.2 stimulus bill. “If there’s one thing the CARES act has shown, it’s that the IRS is central to any economic recovery. Period. And we better make sure it can operate,” said Olson, the executive director and founder of the Center for Taxpayer Rights, a non-profit organization promoting due process for taxpayers. Mrs Olson also pointed out that the IRS is “limping” on matters like customer support and IT systems. The article has explained Mrs Olson feels that the agency needs a budget that increases over time — and a breather after a 35-day government shutdown from 2018 to 2019 disrupted operations, and then the coronavirus’s complications this year. There are some predictions that the Biden administration could end up keeping Charles Rettig, the IRS commissioner and a Republican who started in 2018 after a legal career defending individuals and businesses with tax disputes. Howard Gleckman, a senior fellow in the Urban-Brookings Tax Policy Center told MarketWatch that “If Biden wants more money for the IRS, better to have a Republican commissioner ask for it than a Democratic IRS commissioner ask for it,” said Gleckman.
Expanding tax credits for companies, individuals and 401(k) contributions
(image credit: Urban-Brookings Tax Policy Center)
“I think there are some very real opportunities,” said Mark Everson, a former IRS Commissioner who led the agency from 2003 to 2007, during George W. Bush’s administration. The coronavirus pandemic has underscored the importance of a domestic supply chain, said Everson, now vice chairman of alliantgroup, a tax consulting firm.
That means both sides of the aisle will weigh how they can expand company tax credits on research and development, as well as added incentives for manufacturing on American soil, he said. Bipartisan deals could also come on expanded tax credits for families juggling work and kids, he said. The stimulative measures in Biden’s plan that ease tax burdens on low- and middle-income families will likely be the easiest for a Congressional majority to swallow. That includes provisions like the Child Tax Credit, currently paying up to $2,000 per qualifying child, and the Child and Dependent Care Credit, now offering up to $3,000 in care expenses for kids and dependent adults or $6,000 for two or more qualifying dependents.
“Things that promote work will be seen as worth considering,” Everson said.
The same goes for long-term financial planning. “There’s a lot of interest in both parties to do something to encourage people to save more for retirement,” said Howard Gleckman, a senior fellow in the Urban-Brookings Tax Policy Center.
There are already two bills with sponsors on both sides of the aisle. The “Securing a Strong Retirement Act” would, among other things, push the required minimum distribution to age 75. The “Retirement Security and Savings Act” would do the same in its list of provisions.
Then there’s Biden’s call for a 26% refundable tax credit kicking in for each dollar contributed to an IRA or 401(k). Between all that, it’s possible Biden and lawmakers can find some common ground, he said. “Best case, some modest changes in 2021. Worst case is nothing, but I think that’s unlikely.”
Redefining who’s eligible for a tax break for low-income families
So as a little history lesson, after Congress passes tax legislation and the president signs it into law, it falls on the Treasury Department and the IRS to develop the regulations that flesh out these laws. After the TCJA’s was enacted the IRS was publishing revised guidance even 2 years after. There are still some tax law sections that could be tinkered with. As an example there could be more efforts put forth to further clarify the definition of a child for Earned Income Tax Credit purposes. Pete Sepp, president of the National Taxpayers Union, stated that “there is room for substantial progress.” To elaborate, the credit for low- and moderate-income working families has been hailed as a powerful anti-poverty measure, but Sepp said there are unclear definitions on who can claim a child and get the credit. That results in too many audits, which can mess up the payments for a lot of people who really could use the money. Mr Sepp, feels that this could be a helpful area to define further. There are also areas that Biden should not try to change.
The Trump administration’s Tax Cuts and Jobs Act of 2017 lowered the corporate income-tax rate and temporarily decreased most income tax brackets. It also established tax laws surrounding the money U.S. multinational companies made on intangible assets held abroad, like patents and copyrights. The Treasury Department spent three years after that crafting rules on the tax’s specifics, according to Sepp. Now Biden mentioned several times while campaigning that he wants to raise the corporate rate from 21% to 28%, but if he can’t do that,
Mr Sepp to MarketWatch that yes Biden’s new Treasury Department could in theory rip up the rules on multinationals and go tougher. He feels that would not be a good decision, because In the face of uncertain tax rules, companies might hoard cash they’d otherwise use on new hires. “Wherever the tip of the spear is aimed, the wound spreads to many more taxpayers,” he said.
Mark Everson, a former IRS Commissioner during George W. Bush’s administration stated that the IRS is a non-partisan agency following the laws as written. “It’s important to retain the independence of the IRS. For that reason I think the administration will tread carefully. I don’t think there will be a lot of regulatory changes.”
Making taxes simpler for gig economy workers
The ‘gig’ economy workers such as freelancers, independent contractors, and solopreneurs have some regulations that are ripe for change. As an example, the Treasury Department has a rule saying platform companies that connect consumers seeking a service and sellers offering their service (like a car trip) have to provide the seller with tax paperwork on earnings. But Caroline Bruckner says the Treasury Department insists on a rule saying the companies only have to pass along the tax documentation for payment that exceeds $20,000 and 200 transactions. This can be quite confusing for these gig workers on what their tax obligations are exactly. Which can open them up to audits and not giving the feds an accurate read on what the gig worker is paying into incomes taxes — and Social Security taxes, a number that, years later, will be used to determine the size of the worker’s Social Security checks.
“It’s a really complicated issue, but it boils down to: The IRS can fix this. It doesn’t need an act of Congress” to address a problem that’s “to the detriment of millions and millions of workers,” she said.
A Government Accountability Office (GAO) report dug into the issue earlier this year, and recommended a change in the rule at issue. IRS officials said they had to address “other priorities,” like rules and guidance on the Tax Cuts and Jobs Act, according to the GAO report.
So as the Tax Policy Center article had concluded that Biden’s biggest revenue-raisers are an increase in the corporate tax rate from 21 percent to 28 percent and a provision to impose the Social Security payroll tax on wages above $400,000. Are those two going to happen? Most likely not, especially if the economy remains weak due to the Covid-19 still spiking and limiting normal business activities.
But some public opinion surveys show strong support for raising taxes on the rich, even among Republicans. Combining modest tax cuts for low- and middle-income households with tax increases on high-income households or, say, corporations with lots of foreign income, may be hard for even some Senate Republicans to resist. Especially if the Hill GOP beats the drum for deficit reduction with a Democrat in the White House.
To be sure, some of Biden’s ideas face tougher odds in a GOP Senate. Raising tax rates on long-term capital gains and dividends, taxing unrealized gains at death, increasing the estate tax, or raising the top individual income tax rate feel like non-starters.
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