The GameStop Corp. logo on a laptop and the Robinhood application on a smartphone.
Tiffany Hagler-Geard | Bloomberg | Getty Images
Rep. Ro Khanna, the Silicon Valley legislature in Congress, proposed a bill on Thursday aimed at improving the Internal Revenue Service's enforcement tools and ability to fight tax evasion.
The legislation passed would gross $ 70 billion for the IRS between fiscal 2022 and 2031 to help the agency hire additional staff to screen individuals with total income greater than $ 1 million. Companies with assets of more than $ 20 billion would also be prioritized for audits under the plan.
Another $ 20 billion is earmarked for enhanced taxpayer services and $ 10 billion is earmarked for upgrading the tax collector's outdated technology to make the fight against fraud more effective.
In announcing the legislation, Khanna's office cited the dramatic price volatility of a few stocks over the past month, including that of video game retailer GameStop.
"We know our tax system is broken and it's been a long time since we started fixing it," the California Democrat and Deputy Whip of the Progressive Congressional Caucus said in a press release.
"Right now, the richest percent are responsible for roughly 70 percent of the 'tax gap' – the difference between taxes owed and taxes paid. It is time for every American to pay their fair share," he added.
U.S. Representative Ro Khanna, Democrat of California, speaks during a press conference following a vote in the U.S. House to end U.S. military involvement in the war in Yemen on Capitol Hill in Washington, DC on April 4, 2019.
Saul Loeb | AFP | Getty Images
To aid the IRS's efforts to learn more about the country's top earners, those who earn more than $ 400,000 a year and receive income from "previously undisclosed sources" would have to disclose their earnings in a new 1099 report.
Khanna's bill, which his office estimates would generate $ 1.2 trillion in revenue, relies heavily on a study by Natasha Sarin, professor at the University of Pennsylvania, former Treasury Secretary Larry Summers, and the former IRS – Commissioner Charles Rossotti was released.
In a 2020 report titled "Reducing the Tax Gap," the trio wrote that the federal government is missing hundreds of billions of dollars in revenue each year due to taxes that are legally owed but not paid. Most of this tax gap is due to people failing to declare their income on tax returns.
They claim that unpaid taxes are more than any individual income taxes paid by the lowest 90% of the workforce.
"The failure of a minority of taxpayers to pay what they owe places significant burdens on those who fully comply," wrote Sarin, Summers and Rossotti.
"Our work previously called for annual exam rates to be raised to at least 20 percent for those who earn more than $ 1 million annually and tend to have less visible sources of income," they said. "A significant increase in exams for high income returns requires the recruitment and training of more agents who are capable of complex exams."
Despite Khanna's bill, Congress has failed to intervene for years to stem the inflation-adjusted decline in IRS funding.
At the 2020 Budgetary Congress passed last year, total funding from the IRS was $ 11.5 billion, up 1.8% year over year. However, taking inflation into account, the budget represented a cut and almost all of the cash added represented a mandatory wage increase for the existing staff.
Overall, IRS funding has declined more than 20% since 2010, including inflation.
Budget erosion has reduced the amount of money the IRS has to pay for auditors and law enforcement officers, meaning the government is less able to collect the taxes owed. The agency lost more than 33,000 full-time positions between 2010 and 2020.
In the meantime, this downsizing has severely curtailed the service's ability to audit. A report released by the IRS in 2020 showed that taxpayers are now half as likely to be audited as they were in 2010 – with just 0.45% of tax returns audited in fiscal 2019.
The timing for Khanna's announcement was propitious as House lawmakers prepared to grill key characters in one of Wall Street's most eye-catching New Year stories.
CEOs of companies directly involved in the frenzied trading activity that took place in a handful of stocks last month, including that of video game retailer GameStop, are due to testify before the House Financial Services Committee later Thursday.
That stock, which was valued at $ 4 a share a year ago, had just risen more than 8,000% from $ 347 to $ 347 in January as a coordinated effort by retail investors set off an extreme, if temporary, example of what known on Wall Street as the Short Squeeze.
Dozens of progressive politicians, including Khanna and Senator Elizabeth Warren, D-Mass., Touted the suspicious trade as dangerous and further evidence that regulators like the Securities and Exchange Commission need to play a more active role in the securities markets.
GameStop stock has lost more than 75% of its value since those highs.
The executives of trading platform Robinhood, social media site Reddit, market maker Citadel and hedge fund Melvin Capital are expected to testify.