Return of the IRS Scandal

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That didn’t take long. Less than half a year into the Biden Presidency, the Internal Revenue Service is already at the center of an abuse-of-power scandal. That news broke Tuesday when ProPublica, a website whose journalism promotes progressive causes, published information from what it said are 15 years of the tax returns of

Jeff Bezos,

Warren Buffett

and other rich Americans.

Leaking such information is a crime, since under federal law tax returns are confidential. ProPublica says it received the files from “an anonymous source” and doesn’t know who provided them, how they were obtained, or what the source’s motives are.

Allow us to fill in that last blank. The story arrives amid the Biden Administration’s effort to pass the largest tax increase as a share of the economy since 1968. The main Democratic argument for a tax hike is that the rich should pay their “fair share.” The ProPublica story is a long argument that somehow the rich don’t pay enough. The timing here is no coincidence, comrade.

Someone at the IRS—or someone who hacked the IRS—leaked the documents to influence the debate in Congress. And right on time,

Ron Wyden,

the Senate’s chief tax writer, opened a Finance Committee hearing Tuesday by mentioning the ProPublica data dump.

“What this data reveals is that the country’s wealthiest—who profited immensely during the pandemic—have not been paying their fair share,” Mr. Wyden said. “I’ll have a proposal to change that.” You can bet he will.

***

Yet the striking fact of the initial ProPublica story—it says the disclosures will continue for months—is how undramatic the findings are. It turns out that billionaires are very good at reducing their taxable income. Who knew?

Investors and entrepreneurs like Messrs. Buffett and Bezos make most of their money from the appreciation in the value of their assets. Most of Mr. Bezos’s wealth comes from the rising value of his stock in

Amazon,

which he founded. Mr. Buffett has long admitted he pays a relatively low income-tax rate because his wealth is based in the value of his company,

Berkshire Hathaway.

There is no evidence of illegality in the ProPublica story. As these columns keep pointing out, the rich can afford to hire lawyers and accountants to exploit every part of the tax code to pay the minimum amount of income tax the law allows.

ProPublica knows this, so its story tries to invent a scandal by calculating what it calls the “true tax rate” these fellows are paying. This is a phony construct that exists nowhere in the law and compares how much the “wealth” of these individuals increased from 2014 to 2018 compared to how much income tax they paid. ProPublica says that Mr. Buffett’s “true tax rate” over that period was only 0.10%.

But wealth and income are different, and what Americans pay is a tax on income, not wealth. ProPublica makes much of the fact that these billionaires pay a lower rate on capital gains and dividends than they do on income. The story suggests this is unfair, but it isn’t.

The preferential rate for capital gains and dividends has been a central part of the tax code for decades, and for good reasons. Congress has wanted to encourage capital investment; assets are often held for decades and gains are only realized upon their sale; gains can’t be adjusted for inflation over the years they are held; and investors can’t deduct net capital losses from income beyond $3,000 a year. Bipartisan majorities have long supported this part of the tax code.

But this has changed as the political left has risen in the Democratic Party, and Sens.

Elizabeth Warren

and

Bernie Sanders

ran for President calling for a new tax on wealth. The ProPublica story essentially argues for the Warren-Sanders agenda. We’ll leave the case against such a tax for another day, but the political point is that Ms. Warren and Mr. Sanders lost. Mr. Biden didn’t run on a wealth tax.

***

This still leaves the real scandal, which is that someone leaked confidential IRS information about individuals to serve a political agenda. This is the same tax agency that pursued a vendetta against conservative nonprofit groups during the Obama Administration. Remember

Lois Lerner

?

This is also the same IRS that Democrats now want to infuse with $80 billion more to chase a fanciful amount of uncollected taxes. As part of this effort, Mr. Biden wants the IRS to collect “gross inflows and outflows on all business and personal accounts from financial institutions.” Why? So the information can be leaked to ProPublica?

The IRS says it has begun an investigation into the tax-return disclosure, and by all means send the guilty to prison. But Congress should also not trust the IRS with any more power and money than it already has.

Main Street: The Democrats’ proposed tax deduction for the rich puts the Vermont socialist and low-tax Republicans in the same foxhole. Images: Getty Images Composite: Mark Kelly

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the June 9, 2021, print edition.

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