Opinion | Finance

Do you want the IRS spying on your bank account to go after 'the rich'?

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As sure as night follows day, when politicians claim to want to go after "the rich," it is the middle and lower classes who should guard their pocketbooks.

One of the latest and most egregious examples is the proposal to have the federal government, via the Internal Revenue Service, spy on every American with a bank account whose combined inflows and outflows add up to over $10,000 per year, including summaries for cash. Senate Democrats on Tuesday changed the amount from the $600 originally proposed by the Biden administration.

Still, the revised number and guidelines are distinctions without much of a difference. The justification for mass surveillance of the average American's bank accounts is littered with disingenuous obfuscation.  According to the Treasury Department, the IRS absolutely needs to comb through everyone's transactions in order go after wealthy individuals who underreport their tax liability.

Citing the "tax gap" - the difference between taxes owed and what the government collects - an official blog post from the deputy assistant secretary for economic policy claims that "tax evasion is concentrated toward the top of the income distribution because higher-income taxpayers have the ability to tap into the services of accountants and tax preparers who help shield them from bearing their true income tax liability."

The capital streams to which Treasury refers involve "opaque income streams like proprietorships." And the estimates about underreporting from business entities are driven by audits that are missing information from "returns at the pass-through business level." 

Unsurprisingly, none of that rationalization holds water. 

It is interesting that the Treasury alleges "tax evasion," as opposed to "tax avoidance." The common refrain in conversations about taxes and taxpayer compliance is that the latter is illegal, but the former is not. The premise here is that accountants and tax preparers are encouraging or facilitating law-breaking by their clients. 

If that is the case, and if high-income earners are at fault, then coming up with targeted policy and/or enforcement solutions to go after these specific situations and taxpayers would be a lot more in line with the supposed justification - and certainly a lot more efficient - than snooping on virtually all banking transactions by ordinary Americans.

Treasury's highlighting of proprietorships and pass-through entities is also deeply troubling - and a great example of the duplicity involved in proposing this regulatory regime. What they are referring to, of course, is small businesses.

Everyone, from the struggling sole proprietorship fighting to survive in the era of COVID-19 to mom-and-pop retailers, will find themselves in the IRS's crosshairs. 

Based on the data about small businesses, the desire to target them is chilling for the entire economy. More than two-thirds of the over 30 million small businesses in the U.S. (as of 2018) are individually operated, with the owner as the sole employee. It may surprise some to know that 99 percent of American businesses are small, and that 120 million Americans - nearly half of all workers - are employed by small businesses. 

The role of small businesses is especially key in underserved communities. Hispanic Americans, for example, start small businesses at a rate three times that of the general population and have seen some positive growth, especially pre-pandemic, despite facing unique challenges that include access to capital.

These businesses are key to wealth and job creation, including in the communities where they are located. And it is these small businesses, mentioned by the Treasury, that will become easy prey for government bureaucrats eager to fulfill their mission of "closing the tax gap."

Small businesses and individual taxpayers will lack the resources - "the services of accountants and tax preparers" mentioned by the Treasury as tools of the wealthy - to push back against agents who can make hay of every transaction across every account. Those services, ironically, will become a deterrent to agents targeting the wealthy. That doesn't even account for the fact that the wealthy have a plethora of legally permissible tax shelters and business structures for their assets. And again, none of those apparently are being discussed when it comes to the tax gap or who will experience changes to tax law.

All of this makes it a farce that the IRS will be able to execute this proposed regulatory regime "using information that financial institutions already possess, without imposing any burden on taxpayers whatsoever." The costs of implementation - to community banks, credit unions, and even gig economy app services - will be enormous and will be passed on, like other costs, to account holders. The costs will fall disproportionately on people with lower incomes.

The average monthly rent in the United States is about $1,100, so despite the changes proposed by Senate Democrats that include exemptions for wages, millions of working families still will face higher costs and will have to deal with the suspicion that inevitably would come from government surveillance of their bank accounts.

All of this, of course, is being proposed in the name of going after "the rich."

Mario H. Lopez is president of the Hispanic Leadership Fund, a public policy advocacy organization that promotes liberty, opportunity and prosperity for all Americans. Follow him on Twitter @MarioHLopez.

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