The Congressional Budget Office will soon publish its analysis of the financial impact of a “Rebuilding Better Legislation” project that congressional Democrats hope to pass by the end of the year. This official “outcome” will determine whether the welfare and green energy bill garners enough votes to become law.
There are already signs of a dead end. The CBO questioned the legislation’s main assumption – how much additional tax revenue would the IRS’ stricter enforcement measures bring. President Biden’s summary of the legislation estimates that an additional $80 billion to strengthen the IRS over a decade would bring in $480 billion in lost tax revenue, for a net $400 billion. But the Central Bank of Oman believes that the same additional amount of financing will net only $125 billion.
That $275 billion gap means the means the bill could add to the national debt, violating a condition of some moderate Democrats who insist the bill should be “fiscally responsible.” Passing the BBB legislation would require nearly every Democratic vote in Congress, so the CBO’s result on taxation could end up being a major impediment to its passage.
CBO Director Phil Swagel explained the various estimates in a webinar held on November 15 sponsored by Yahoo Finance and the Bipartisan Policy Center. “One of the key aspects of our estimation is the idea of deterrence,” Swagel said. “Another analysis that places significant weight on the idea of deterrence, is that if the IRS does more scrutiny, people pay more of their taxes. The research literature on this topic is very mixed for high net worth individuals and large corporations. Others in the same situation are subject to scrutiny or scrutiny, they sometimes take a more aggressive stance. We ended up getting down in the middle of the deterrence effects literature. Others take a more optimistic stance.”
[Read more: This element of Biden’s agenda ‘has led to higher inflation’: Congress’s Budget Chief]
[Click here to get Rick Newman’s stories by email.]
The basic idea behind strengthening the IRS is to offset a decade of declining funding and provide money for new auditors, updated technology, and better customer service. Americans avoid paying up to $1 trillion in taxes they owe each year, according to IRS Commissioner Charles Rettig. That’s a huge amount that would boost total US government revenue by 20% if the IRS could collect it in full. Most of the “tax gap” stems from corporations and financial assets owned by the wealthy, which provide income that is easier to hide than business income reported directly to the government.
Tougher doubts about tax enforcement
Narrowing the tax gap is an important source of funding for the BBB bill, which would entail about $2 trillion in new spending on social welfare programs and green energy investments over a decade. The White House estimates that tougher taxes will be the third largest source of funding for those programs, after an additional income tax for millionaires (which the White House says would raise $640 billion over a decade) and a new minimum tax on big corporations ($443 billion). ). President Biden has repeatedly said that his BBB plan will “pay for it,” meaning that there will be enough new taxes to cover all of the new spending. But this cannot be true if the application of stricter taxes is too little.
The CBO says it will publish its full analysis of the BBB bill by Friday, November 19. This is likely to include an estimate of the tax enforcement clause published by the Central Bank of Oman in September, which cited several uncertainties in forecasting the amount of stricter taxation. will raise. One question is whether taxpayers would report their income more honestly if audit risks were higher. The CBO believes that this type of compliance will improve “only modestly”. The IRS may also not be able to hire all the experienced auditors it wants. And while the agency desperately needs better computer systems, it’s not clear to what extent this might improve tax collection.
The Balance Sheet Office isn’t the only group that thinks the White House’s tax enforcement estimates are too high. Ben Wharton’s budget model, which does an independent analysis of the landmark legislation, believes that $80 billion in additional funding for the IRS will net $190 billion in new revenue — less than half the White House estimate.
House Speaker Nancy Pelosi said she wants the House to vote on the BBB bill as soon as the CBO publishes its result. But if the math doesn’t work and a funding shortfall occurs, the House of Representatives may have to amend the bill, either coming up with new revenue or cutting spending. Even if the House passes the bill by Thanksgiving, it will almost certainly be amended in the Senate, where moderate Democrats Joe Manchin of West Virginia and Kirsten Sinema of Arizona have their own concerns about excess spending, high taxes and additional debt. Rebuilding a depleted IRS will probably help no matter what, but it may not be the panacea Democrats are hoping for.
Rick Newman is the author of four books including:Rebounders: How winners pivot from setback to success.Follow him on Twitter: Tweet embed. You can also Send secret tips.
Get the latest financial and business news from Yahoo Finance