The IRS Is Biden’s Infrastructure

President Joe Biden will focus his Wednesday night speech on one of his multitrillion-dollar spending plans. This one aims to make permanent many of the enacted and proposed emergency entitlements of 2020, especially in education. Ironically, this sector of the economy has experienced a windfall of federal subsidies over the past year even while many practitioners have remained far away from classrooms. But while teachers unions may be controversial, they are not nearly as unpopular as tax collectors, who also figure prominently in tonight’s presentation. The new Biden plan relies on an historic expansion of Washington’s most infamous bully, the Internal Revenue Service.

A White House fact sheet says that the Biden plan to expand IRS enforcement will increase federal revenues by $700 billion over 10 years. Just as with his tax rate increase on income and a historic surge in the top capital gains tax rate, Mr. Biden is claiming that his tax collection pain will only be inflicted on rich people. The White House forecasts a total tax grab of $1.5 trillion over 10 years.

James Lucier of Capital Alpha Partners writes in a note to investment clients:

Still, it is very hard to see where the $1.5 trillion revenue estimate comes from since it is roughly triple what we would expect to see [from the proposed tax code changes] based on independent think tank estimates…

The White House fact sheet offers no further details, except that it states that IRS revenue collections could be much improved, and it links to an NBER working paper by Natasha Sarin and former Treasury Secretary Larry Summers, who estimate that the IRS could collect a net of $1 trillion in additional revenue over the next ten years with an additional $100 billion in funding. The same paper estimates that only 55% of taxable income in such categories as dividend income, capital gains, and proprietorship income [is] properly reported by upper-income taxpayers, resulting in a loss of revenue for the federal government.

Tax reporting, financial surveillance, and the legendarily antiquated IRS computer system all need to be improved, the fact sheet argues – which leads us to the conclusion that the IRS is now critical infrastructure.

The problem is not just that the items detailed in the Biden plan are unlikely to cover the advertised cost—raising the threat of additional tax hikes as Nancy Pelosi and Chuck Schumer go to work on the details—but also that the cost will be much larger than advertised. Andy Laperriere and Don Schneider of Cornerstone Macro write today:

On paper, the plan is close to being financed. Upon closer inspection, the revenue needed to fully fund these changes over time is multiples of what the administration is proposing for a host of reasons… many of the new entitlements take a very long time to phase in (universal pre-k, paid leave, free community college), so their outyear costs will swamp their near-term costs… under Biden’s plan, the states must pony up some of the costs over time (half the cost of universal pre-k and 25% of the cost of free community college), so that money will have to come from higher taxes (or other budget cuts) at the state level.

They conclude that this latest Biden spending blowout is “a massive increase in entitlements” that is “largely unfinanced.” That means imposing more federal debt on our children to enrich the education system that keeps informing us from a distance that it cares about our children.