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Senate Finance Committee: Examining How the Tax Code Affects High-Income Individuals and Tax Planning Strategies

Senate Finance Committee

Examining How the Tax Code Affects High-Income Individuals and Tax Planning Strategies

Thursday, November 9, 2023

 

Topline

  • Democrats asked questions about how to ensure that the ultra-wealthy are paying their fair share in taxes and how taxes can be redistributed to help the middle- and lower-classes.
  • Republicans expressed concerns about higher taxes and surveillance from the IRS on higher-income individuals will hurt the economy and their individual success.

 

Witnesses

  • Ms. Chye-Ching Huang, Director, Tax Law Center, New York University School of Law
  • Mr. Morris Pearl, Chair, Patriotic Millionaires
  • Dr. William McBride, Vice President of Federal Tax Policy, Tax Foundation
  • Dr. Douglas Holtz-Eakin, President, American Action Forum

 

Opening Statements

Committee Chairman Ron Wyden (D-Ore.)

In his opening statement, Wyden said that working-class people don’t get to play by the same rules as billionaires. He explained that the hearing would discuss a tax evasion strategy called “Buy, Borrow, Die” in which a corporate raider buys a business, then they borrow against its growing, untaxed value to fund an extravagant lifestyle, and then pass their assets onto their children, often tax free, when they die. Wyden said this is a persisting cycle for the rich. He noted that the average billionaire can wriggle their way to paying 8% as a tax rate while nurses and firefighters making $45,000 a year are paying a 22% tax on their wages. Wyden said it’s time to look at solutions that restore fairness to the tax code while still rewarding success. Wyden said there is a solution to these issues called Mark to Market which would require billionaires to pay taxes every year like everyday Americans. He also said that restoring fairness to the tax code could be bipartisan, pointing to the creation of the Roth IRA as an example. He closed by saying that growing support and demand for solutions that restore fairness to the tax code, level the playing field for working families, and promote success.

 

Committee Ranking Member Mike Crapo (R-Ida.)

In his opening statement, Crapo began by saying that neither party supports wealthy Americans illegally cheating their taxes. He went on to say framing the issue of the tax code through the subjective lens of fairness often ignores the facts and turns a blind eye to favored initiatives or incentives. He stated that tax incentives are meant to drive behavior and that Congress can’t ignore incentives that benefit the wealthy like subsidies for expensive electric cars, costly energy home efficiency upgrades, and proposals to repeal the cap or expand the highly regressive deduction for state and local taxes. Crapo explained that most of the federal tax burden is paid by high earners and that higher income taxes serve as disincentives to work, save, and invest. Crapo stated that Republicans remain focused on safeguarding taxpayers, their rights and reducing barriers to work savings and investment and promoting opportunity and wealth to improve the quality of life for all Americans. He explained that in 2017, the Republicans passed tax cuts across the board which primarily benefitted middle income workers and supported simplifying the tax code, expanding the child tax credit, and limiting regressive spending like the SALT (State and Local Tax) deduction. Crapo closed by saying the conversation around a massive tax gap is misguided as the current tax gap is in line with the 20-year average when looked at as a percentage of GDP and stated that the voluntary tax compliance rate was unchanged from previous years.

 

Testimony

Ms. Chye-Ching Huang, Director, Tax Law Center, New York University School of Law

In her testimony, Huang said tax breaks increase deficits and deepen inequality, harm the economy by locking up capital and old investments, and allow the highest income earners to choose when to pay income tax. She noted that large, outright tax subsidies for wealth cost the federal government more than $200 billion last year. Huang closed by asking lawmakers to move federal and private resources away from tax breaks on wealth and instead make better investments in the nation’s future.

 

Mr. Morris Pearl, Chair, Patriotic Millionaires

In his testimony, Pearl said people who are rich don’t need taxable income because they’re already rich. He asked Congress to help reorient the way we tax the ultra-wealthy and to tax unrealized capital gains. He also suggested that the money made by investors should be subject to taxes just like the money made by your constituents who work for a living. Pearl explained that investors and businesspeople do not want a nation with a few rich people and lots of people just struggling to get by as that would in turn harm the economy and their investments. He closed by stating that money doesn’t trickle down, money trickles up.

 

Dr. William McBride, Vice President of Federal Tax Policy, Tax Foundation

In his testimony, McBride said more than half of federal tax revenue comes from individual income taxes and that volatility reflects broader fluctuations in the economy and financial markets combined with the fact that a large share of federal tax revenue comes from taxing capital gains and profits. He said the federal income tax burden is paid by high earners, as is the majority of the entire federal tax burden. He encouraged lawmakers to simplify the tax code so that taxpayers can understand the laws and the IRS can administer them with minimum cost and frustration.

 

Dr. Douglas Holtz-Eakin, President, American Action Forum

In his testimony, Holtz-Eakin said a problem the US faces is subpar economic growth over the long-term trend, while the second problem is that the American fiscal house is fundamentally unsustainable. He said economic growth can be a route to improving the US’s fiscal outlook. Holtz-Eakin suggested that spending on Medicare and Social Security explains the rise in deficits over the next ten years. He closed by saying it’s imperative that the US have faster and sustained economic growth and tax policy should be, in a very disciplined way, focused on being pro-growth.

 

Question & Answer

IRS and Federal Oversight

Sen. Bob Menendez (D-N.J.) asked Huang if cutting the IRS’s budget for enforcement would increase or decrease the federal government’s revenue. Huang said it decreases the federal government’s revenue and adds to deficits. Menendez followed up asking how much the 2017 Republican tax cuts raised deficits by and if it paid for itself. Huang said she estimated $1.9 trillion over 10 years and that it did not pay for itself.

 

Sen. Marsha Blackburn (R-Tenn.) expressed concern that the Biden administration’s pledge to not audit individuals making under $400,000 was a misnomer due to their use of the term “total positive income.” She then asked Holtz-Eakin for a definition of total positive income and what concerns small businesses should have about this. Holtz-Eakin said he couldn’t give a definition because it was a term made up and used by the administration and said that cheating on taxes at any level should not be permitted and that audit likelihood should not be based on income levels. Blackburn asked if any panelists had a definition, to which Huang responded that she agreed with Holtz-Eakin and that setting thresholds allows tax evaders to fly under the radar. Pearl added that a business should not fear the IRS so long as they are following the laws.

 

Sen. Maggie Hassan (D-N.H.) asked how Congress can ensure that major corporations and the very wealthiest are paying their fair share. Pearl said the IRS needs the funding to hire lawyers and experts who can deal with these things and noted that it’s not the people breaking the laws, it’s that the laws are broken. Hassan then asked when the tax laws on the books allow wealthy individuals to avoid taxes, what should be done to change that. Pearl said he suggests changing the laws to ensure economic income from increased in your assets’ value is taxed in same way as ordinary income for the highest earners.

 

Hassan then asked Huang if underreporting of income by the ultrawealthy divert resources away from improving taxpayer services at the IRS. Huang said the IRS shouldn’t be focusing on tracking down the small amounts of money from low and moderate-income Americans because these usually stem from mistakes while their tax returns or for child tax credit.

 

Sen. Tom Carper (D-Dele.) asked how IRS funding bolsters the fiscal health of the US and how would the proposed repeal of IRS investments impact taxpayer compliance. Huang said that funding means the IRS can provide help as simple as having the IRS be able to answer a question for someone who wants to do their taxes well and would make an error if they couldn’t get straight answers to their concerns. The other part is going after more intentional instances of evasion which require highly skilled auditors.

 

Carper then asked Huang if she believes that the role of non-compliant sole proprietors demands more attention from the IRS. Huang said she does believe in that role.

 

Middle and Lower-Income Workers

Crapo asked Holtz-Eakin who pays corporate taxes. Holtz-Eakin said that individuals pay corporate taxes, either through shareholders or through the firm’s workers through lower wages.

 

Menendez asked if using some of this potential revenue from increased taxes towards making childcare affordable is a worthwhile investment. Pearl agreed and said it means that consumers would be able to pay for things more easily and parents would be able to work more. He noted in New York that childcare programs have allowed more mothers to return to work and increased tax revenues.

 

Carper asked Huang how audit enforcement has historically contributed to wealth and racial inequality. Huang said Black filers are more likely to be audited by the IRS, even at the same income levels as their white counterparts.

 

Sen. Bob Casey (D-Pa.) asked what the best way is for Congress to ensure that businesses’ high profits are being appropriately taxed so that the US could redirect or reinvest those dollars into the middle class and put money back into the pockets of those families. Huang noted that the biggest issue is double non-taxation of corporate profits and gains also not paying taxes at the individual level.

 

Sen. Ben Cardin (D-Md.) asked how Congress can help middle and low-income taxpayers with the type of information outreach and services that can make it easier for them to comply with the US tax code. Huang said moderate-income filers don’t have expensive tax advisors and they count on lawmakers to provide the IRS with resources.

 

Tax Rates and Tax Breaks

Wyden asked Huang to elaborate on the “Buy, Borrow, Die” tax scheme that he mentioned earlier in his testimony. Huang responded saying that billionaires get extremely low rates on loans because of their wealth and then will often roll over those loans instead of paying them back or, if they do pay them back, pay them off with cash from other income streams which are already taxable, all while receiving tax benefits. Wyden asked if there are lawyers and accountants that specialize in this space. She responded yes and noted that the tax schemes get more complex with the more income streams a person has.

 

Wyden asked Pearl if his argument was that if taxes were increased on the wealthy, that their drive to continue to do well would not be diminished. Pearl agreed saying wealthy people would rather invest their money at a high return and pay taxes on that return than get no return at all. Pearl also noted that the people being affected by the Chair’s proposals are people who make hundreds of millions and billions of dollars a year, not people who make hundreds of thousands of dollars or even a few millions of dollars a year.

 

Crapo asked Holtz-Eakin what he thinks the solution is to differential tax rates in things like ordinary income and capital gains. He said that the solution is to have tax rates equalized at as low of a rate as possible so that there is a lesser chance of tax avoidance schemes. Crapo followed up and asked Holtz-Eakin and McBride if we must make every household realize their unrealized gains every year. Holtz-Eakin said he is not a fan of that strategy and instead pointed to systems where you efficiently collect taxes at the entity level and so that money never escapes into the markets. McBride said we should strive to remove differential tax rates and that we have a plan to equalize tax rates modeled after Estonia’s system where all income streams are taxed at 20%.

 

Hassan asked all panelists what their top recommendation is to close the tax gap. Holtz-Eakin said the government needs to change the tax code to limit opportunities to go around the law. McBride recommended a radical simplification of the tax code. Pearl said that the IRS needs to be funded. Huang noted that a complex series of tax breaks push people into that gray area, and then sometimes over the lines.

 

Sen. Bill Cassidy (R-La.) asked Pearl that if it is fair to say that given the statistic that a bulk of taxes are paid by the top earners in the country while at the same time many wealthy people avoid taxes, then there is a smaller group you would be led to believe paying the bulk of taxes in the US. Pearl said this is correct and Huang agreed. Cassidy then asked Holtz-Eakin if he would repeal capital gains tax and treat all income as ordinary income. He said that he thinks that either taxing everything at the same rate or removing deductions for expenditure would be fair systems.

 

Sen. Elizabeth Warren (D-Mass.) asked if data shows that companies have used their tax breaks to make new investments. Huang said that the corporate tax cuts in 2017 were even bigger than what companies asked for and that trillions of dollars went into buybacks and dividends. She also noted that economy-wide investment and jobs didn’t grow any faster than they had before the law.

 

 

For more information on this meeting, please click here.

For an archive of past SIFMA hearing coverage, please click here.