Event Recap: Tax Policy in the Build Back Better Act
On September 29, the Committee for a Responsible Federal Budget hosted “Tax Policy in the Build Back Better Act.” The event featured a panel of experts that included American Enterprise Institute senior fellow Alex Brill, New York University’s Tax Law Center executive director Chye-Ching Huang, and the Committee for a Responsible Federal Budget’s senior vice president and senior policy director Marc Goldwein. Richard Rubin of The Wall Street Journal moderated the discussion.
You can find a video of the event here or below.
Rubin opened the event by asking each panelist to provide an overview of the tax provisions in the current reconciliation legislation and how they feed into the Administration’s and Congressional Democrats’ goals. Huang argued the policies are designed to boost family and worker income while providing a path toward long-term growth that’s both sustainable and inclusive. They would raise progressive revenue, improve program integrity, and boost confidence in the overall tax system while also addressing current law tax breaks that create incentives for investments to flow into tax shelters or for tax noncompliance. Meanwhile, Brill argued it’s important to distinguish the motivations for the overall reconciliation legislation and the tax provisions within the package; the tax policies themselves are motivated by a desire to increase the progressivity of the tax code. He mentioned the provisions aren’t a “repeal and replace” of the Tax Cuts and Jobs Act (TCJA) of 2017 but rather an effort to repeal, unwind, partially repeal, or, in some cases, extend and expand some of the TCJA’s policies, which shows that some elements of the TCJA actually have bipartisan support. While the proposals under consideration may foster more tax neutrality between types of investment, they could also raise the overall effective tax rate on investment.
Goldwein stated the reconciliation legislation includes $2.3 trillion of revenue increasing provisions and $1.3 trillion of revenue reducing provisions, with the goals of raising enough new revenue to cover new spending, increasing the progressivity of the tax code, collecting taxes that are owed, making the tax code more efficient and fair by cutting loopholes and tax expenditures, and taxing undesired behavior. He noted that the package recognizes the need to pay for new spending and that the tax provisions would raise progressive revenue and increase the progressivity of the tax code. However, the bill could do more to ensure better information reporting to close the tax gap and take strides to address the stepped-up basis loophole as President Biden proposed in his budget.
The panelists then fielded a series of audience and moderator questions.
Rubin asked the panelists how President Biden’s pledge to not increase taxes on taxpayers earning less than $400,000 per year has shaped the tax provisions in the reconciliation legislation. Goldwein argued the notion that no tax provision can increase taxes on income below $400,000 is a big impediment to tax policy. It’s not only an impediment on how to reform excise and corporate taxes but also the income tax. It creates one set of tax rules for income below $250,000, income between $250,000 and $400,000, and income above $400,000. There’s also loopholes in the tax code that can’t be closed because doing so would affect taxpayers earning less than $400,000 per year. Goldwein argued that the pledge should be reframed to be that the average net effect of the tax provisions cannot increase taxes on income below $400,000.
In that same vein, the panelists discussed how corporate taxes get passed on to those earning less than $400,000 per year and how an increase in corporate taxes would affect consumers, workers, and shareholders. Brill noted that the precise distributional impact of the corporate income tax is unknown, though it is known that a portion of the corporate income tax is borne by workers. When the tax rate on corporate income increases, it impacts wage growth in an adverse manner over time. At the same time, all consumers may be impacted through an increase in prices. Goldwein mentioned that not all shareholders are earning more than $400,000 per year, so they are likely affected by an increase in corporate taxes. Goldwein reiterated his earlier point that the President’s pledge to not increase the tax burden on anyone earning less than $400,000 per year is a big impediment to tax policy and having as narrow an interpretation of the pledge as possible will make for much better tax policy.
The discussion then moved to tax compliance, specifically how the proposed Internal Revenue Service (IRS) enforcement provisions could increase compliance without being an invasion of privacy. Huang stated that information reporting is an integral part of the tax compliance regime, and better information reporting would allow audits to be targeted to those most likely to be noncompliant. Compliant tax filers would benefit because they’d be less likely to be subject to an unnecessary audit. The notion that transaction-level data will be made available to the IRS is false. Banks would report total inflows and outflows to the IRS, which would allow the agency to see if a person has a lot of income flowing in and out of financial accounts that’s not reported. Goldwein mentioned that taxpayers already report their wages and income to the IRS and agreed with Huang that providing the IRS with extra data would allow the agency to better target audits to those who are likely to be noncompliant. He also noted that every President since Ronald Reagan has proposed measures to reduce the tax gap in their budgets, including more IRS funding, better information reporting, and other ways to expand the authority and ability to collect taxes.
The panelists then discussed how the IRS could use the new data acquired through better information reporting. Huang mentioned that ideally the IRS would look at people across a number of years to see if they are reporting large flows through their bank accounts that aren’t explained by their tax returns. The IRS could also use the new information to see how it matches audits it would have already done given its current methods. Meanwhile, Brill noted the new information would allow for better administration and enforcement of the tax code. However, it will take time for these positive effects to materialize. It will take time to hire and train workers, time to build models, and time to figure out how to process the new data. When it comes to closing the tax gap, Brill said we should certainly narrow it but having a zero tax gap would be incredibly burdensome on taxpayers, the economy, and the government.
Rubin asked the panelists if there’s a tax provision not in the current package that they wish was. Goldwein noted that if repeal of the $10,000 cap on the State and Local Tax (SALT) deduction is added in, it should be removed. Alternatively, policymakers could add in full repeal of the SALT deduction for individuals and businesses, which would allow policymakers to raise progressive revenue to fund their agenda. Brill agreed with Goldwein on the SALT deduction for individuals and mentioned that looking to tax carbon would be a way to tie into the clean and green energy provisions in the reconciliation package. Huang, meanwhile, would like to see policymakers go further when it comes to taxation of grants and the interactions between capital and charitable contributions.
The event concluded with closing remarks from each panelist. Goldwein mentioned there’s been little discussion about whether the numbers add up and that they don't. The current reconciliation legislation includes $2.9 trillion of tax increases and health savings to pay for an intended $3.5 trillion of new spending (the actual size of the package is looking closer to $4.5 trillion and could ultimately be $5 trillion to $5.5 trillion). Policymakers need to either cut spending, increase revenue, or do some combination of both to ensure the legislation is fully (or even mostly) paid for. Brill noted the country is already on an unsustainable fiscal path and policymakers should be mindful of how to finance the spending commitments they’ve already made before enacting trillions of new ones. Finally, Huang reiterated her earlier point that the package focuses on the long term: the long-term returns and the long-term budgetary impact of investment.
The Committee for a Responsible Federal Budget is thankful to all those who participated in and attended the event.
Learn more about the Build Back Better Act and the tax gap by checking out our in-depth analyses:
- FY 2022 Reconciliation Resources
- FY 2022 Reconciliation Tracker
- Five Ways to Improve the FY 2022 Reconciliation Package
- Better Targeting in Reconciliation
- Ways and Means Proposes $1.3 Trillion of Tax Breaks, $2.3 Trillion of Tax Hikes
- SALT Cap Repeal Does Not Belong in Reconciliation
- SALT Cap Repeal Would Be a Costly Mistake
- There is No Such Thing as Progressive SALT Cap Relief
- Closing the Stepped-Up Basis Loophole
- CBO Estimates $120 Billion from IRS Funding Boost
- Republican and Democratic Presidents Support Reducing the Tax Gap
- Chartbook: Reducing the Tax Gap
- Primer: Understanding the Tax Gap
- Tax Gap Resources