Senator Wyden Introduces Tax Week Revenue-Raisers

Senator Ron Wyden (D-OR), the Ranking Member of the Senate Finance Committee, introduced five bills this week to close tax loopholes, improve tax compliance, and otherwise raise revenue.

Although new scores have yet to be released, we estimate these bills would likely generate several hundreds of billions of dollars over a decade.

Three of the five bills largely take aim at closing loopholes that high-wealth taxpayers take advantage of, while one would help to reduce the tax gap and one reform the taxation of complex financial products known as derivatives. These bills include:

• The Stop Corporations and High Earners from Avoiding Taxes and Enforce the Rules Strictly Act (Stop CHEATERS), which would provide the Internal Revenue Service (IRS) with $83 billion in funding through 2031 to replace and add to the funding originally appropriated by the Inflation Reduction Act (IRA) and then subsequently rescinded. Specifically, the law would appropriate $46 billion for enforcement, $25 billion for technology and operations support, and $13 billion for system modernization and customer support. 
• The Protecting Proper Life Insurance from Abuse Act would limit the ability of wealthy investors to shelter investments in Private Place Life Insurance (PPLI) policies, which essentially give the tax advantages of traditional life insurance to investors able to access hedge funds, private equity funds, and other investment vehicles. The bill would eliminate the life insurance tax treatment from PPLI policies that are not widely available.
• The Getting Rid of Abusive Trusts (GRATs) Act would crack down on the use of Grantor Retained Annuity Trusts (GRATs), which essentially allow many wealthy individuals to avoid the estate tax. The bill would require minimum and maximum terms for GRATs, disallow transfers in them, and treat income tax paid on GRAT income as a gift.
• The Ending the Carried Interest Loophole Act would eliminate the carried interest loophole, which allows investment managers to characterize some of their compensation as capital gains rather than wage income. The bill would go further than many other proposals by counting carried interest as part of the manager’s compensation annually, rather than when investment gains are realized, and subjecting that compensation to ordinary income tax rates instead of the reduced capital gains rate.
• The Modernization of Derivatives Tax Act would reform how the tax code treats derivatives contracts, which are financial products that businesses use to hedge their practices while investors can use to defer or avoid taxes. The bill would standardize taxation of derivatives by taxing them annually marked to market, applying ordinary income tax rates to them, and making other changes intended to target investors that use derivatives to avoid tax.

While no recent scores of these bills have been produced, we expect they would generate substantial new revenue.

Increased IRS funding is a well-known way to raise revenue without raising taxes, and previous Congressional Budget Office scores of the IRA funding and recissions suggest the Stop CHEATERS Act could potentially reduce deficits by $100 to $200 billion. The Yale Budget Lab has apparently estimated the bill would save $1 trillion over a decade, though this estimate appears far above consensus.

Meanwhile, an earlier version of the carried interest bill would have raised $63 billion over a decade, according to the Joint Committee on Taxation (JCT). Major elements of the GRATs Act were previously estimated to raise over $50 billion. And JCT has previously estimated that reforming derivatives taxes could raise $17 billion. There is good reason to think these policies would raise more today, with estimates going through 2036.

Although reducing tax loopholes and improving compliance cannot generate enough revenue on its own to restore the country to fiscal health, it is a good place to start. We commend Senator Wyden and the cosponsors for their efforts to raise additional revenue and to do so without immediately repurposing the funds for new spending or tax cuts.

Policymakers should consider these and other measures as part of an effort to bring deficits down to 3% of Gross Domestic Product.