In May, the Treasury Department released the Biden administration’s revenue proposals for fiscal year 2022. One aspect of this document that has been underestimated is the administration’s new plan for institutions’ reporting requirements. financial.
The document is unequivocal about the administration’s objective for financial reporting, stating that “this proposal would create a comprehensive reporting regime for financial account information”.
The Biden administration’s goal here is to increase tax revenue by ensuring that no income escapes detection. How will the administration do this? He plans to take advantage of financial institutions like banks.
“[T]its requirement would apply to all business and personal accounts of financial institutions, ”the proposal states,“ including bank, loan and investment accounts, except accounts below a gross flow threshold low de minimis of $ 600 or at a fair market value of $ 600. “
In other words, financial institutions will report all inflows and outflows from businesses and personal accounts over $ 600.
This reporting requirement is far superior to any current requirements imposed on financial institutions. As the document itself indicates, currently only information for certain types of income (including 1099 MISC, NEC, and K forms) requires reporting.
Some may view this proposal from the Biden administration positively. After all, this is not an attempt to raise taxes. The purpose of this policy is to make sure that individuals pay what is legally required, right?
There are two problems with this way of thinking.
Cut off air to market
The first problem is highlighted by the idea of the economist Ludwig von Mises that “capitalism breathes through [the] failures. The great innovations and welfare improvements made available by capitalism have not been generated in a flawless system. Often the most important innovations start as small start-ups with razor-thin margins. As loopholes close, the chances of success for these risky start-ups diminish.
Entrepreneurs are aware of regulatory and tax barriers. When something is taxed, you get less of it. If entrepreneurs are unsure whether a new business is worth it, it is enough to increase the costs slightly to persuade them otherwise. Economists call it “being on the fringes”.
Avoiding taxes and reporting small dollar transactions (intentionally or unintentionally) is another form of loophole. De jure businesses are required to follow strict tax reporting rules, but like the speed limit, de facto reporting often deviates from the official rule.
To understand the danger of forcing businesses to comply with tax laws to the letter, consider how difficult it would be for businesses to do so. The tax code is now so long that no one, including government officials, is sure how long it is. How can business owners be sure they are complying with a document of unknown length? Simply put, they can’t.
Therefore, not only will these increased financial reporting requirements increase entrepreneurs’ taxes on the margin, but they will also force businesses to spend more time and resources ensuring that they are paying the correct amount of tax. . Any tax audit with access to every account transfer over $ 600 will crush businesses without a team of accountants or lawyers able to justify each transfer.
The burden of this policy will therefore fall mainly on small businesses without access to a massive in-house legal team. A policy that punishes small businesses like this may be good for big business, but it’s bad for competition in the marketplace.
As Mises noted, capitalism suffocates flawlessly.
The end of financial confidentiality
The second problem associated with Biden’s proposal is its effect on financial privacy. The administration’s emphasis on increasing financial reporting becomes a constant theme. For example, the “Information Reporting Regime” document also includes cryptocurrency reporting proposals that can be seen as a precursor to the crypto reporting requirements built into the “infrastructure” bill.
The increased financial scrutiny provided by accessing every transaction over $ 600 associated with personal accounts would provide an unprecedented look at the finances of many Americans. Even the powerful political will behind the Patriot Act of 2002 only led to demands that banks report suspicious transactions of $ 5,000 or more.
Much like small businesses, most individuals do not have access to a team of lawyers and accountants in the same way politicians and bureaucrats in DC do. As such, these new requirements are likely to hurt middle-income and poor Americans whose primary source of income is non-traditional. This is not surprising given the Biden administration’s record of menacing concert work, for example.
Some will say that privacy is not necessary because you have nothing to fear if you have nothing to hide. But, again, individuals cannot be expected to conform perfectly to a document of indeterminate length. Unfortunately, as the government gets closer to perfect information, perfect compliance becomes the norm.
At some point, perhaps community banks or other small financial institutions interested in retaining their customers could have resisted this by generating political backlash or workarounds for customers.
However, government policies have effectively destroyed a more decentralized network of financial institutions. Since the early 1990s, the number of small banks has fallen from over 10,000 to less than 5,000. Now politicians are proposing to leverage their relationships with the few big players who are “too big to fail” to fail. examine all aspects of Americans’ finances.
Especially with the closures, the federal government already has small businesses, independent contractors and the economy in general under sway. This new “reporting regime” will only tighten its economically murderous grip.
Peter Jacobsen is Assistant Professor of Economics at the University of Ottawa and Gwartney Professor of Economic Education and Research at the Gwartney Institute. Republished from FEE.org.