With Crypto Tax Rules, Conservatives Chose Tax Cheats Over Free Enterprise

This morning, we woke to the grim news that attempts to repair a broken cryptocurrency regulation in the U.S. Senate infrastructure bill have failed. The huge bill is now expected to pass the Senate today with language that could impose unworkable tax reporting requirements on non-brokers, including miners and software developers. There may still be a very narrow path to repair in the House or through reconciliation, but a major chance for redemption has passed.

The immediate cause for the revision’s failure was Sen. Richard Shelby, an 87-year-old Alabama Republican, who attempted to add defense funding to a proposed fix that required unanimous consent to pass. Shelby is a big ally of Wall Street, but his role here is arguably incidental – unanimous consent from the Senate was always a long shot. If Shelby hadn’t thrown a wrench in it, someone else probably would have.

David Z. Morris is CoinDesk's chief insights columnist.

But in a broader sense, too, a plurality of blame for this mess falls on Republicans.

The crypto provision was rushed into the bill in its current misbegotten form in part because conservative activists and lawmakers rejected a prior revenue proposal: a $40 billion budget allotment to enhance enforcement at the Internal Revenue Service. This was projected to generate $140 billion in added tax revenue, for a net gain of $100 billion – more than three times the $28 billion projected to come from the crypto reporting rules.

Just like the crypto rules, this enforcement funding would have increased collection of taxes that are already on the books rather than create new ones. America has an annual “tax gap” – taxes that are estimated to be owed, but never paid – totaling more than half a trillion dollars. About 60% of that is thanks to people underreporting their income.

And, hey, who hasn’t done some unreported yardwork for cash, massaged a lunch receipt or two, or added a couple square feet to a home office? The problem is that the tax gap isn’t evenly distributed across income levels. American taxpayers on average under-report their income by 4 to 5%, according to a 2021 study conducted by the IRS and nonprofit group Equitable Growth. But better enforcement of taxes on just the top 1% of earners could increase U.S. annual tax revenue by $175 billion, according to the report – nearly one-third of the annual estimated tax gap.

That means nearly one out of every three dollars in unpaid taxes are dodged by just one American out of a hundred.

That’s largely because the wealthy and high earners have access to offshore tools, according to Equitable Growth – as many as one out of 15 members of the category use offshore instruments to avoid taxes. (In volume, by the way, that renders tax evasion via cryptocurrency little more than a footnote.)

The situation also skews enforcement efforts along class lines. Studies have found that IRS investigators are more likely to audit the poorest Americans than the wealthiest, and the IRS in 2019 explicitly admitted to Congress that this is because it is easier and cheaper. That makes sense: The offshore entities and other tax avoidance strategies used by the very wealthy are hard to detect, and are engineered by high-priced lawyers and accountants.

The agency has said for years it can increase enforcement on high-end tax evasion only if it receives more funding. To catch rich tax cheats, the IRS needs to be able to hire skilled, knowledgeable and highly paid lawyers and accountants.

Instead, over the last decade the agency’s budget has been cut by roughly 20% (which also slowed the distribution of pandemic relief). In the last eight years, according to a Syracuse University study, there has been a 72% drop in auditing of individuals earning more than $1 million per year.

By killing the added IRS funding in the infrastructure bill, then, conservatives effectively gave their blessing to mass tax evasion by the leaders and financiers of dozens of industries, from auto manufacturing to social media to pharmaceuticals.

Then, through Sen. Rob Portman (R-Ohio), they filled the gap by squeezing crypto. The gravity of that choice is hard to overstate.

“Ultimately, the Senate failed the country today by passing un-amended ignorant and harmful legislation,” the nonprofit Fight for the Future said in a statement about yesterday’s events. “We must protect the software developers who are trying to create alternatives to the Big Tech companies that are destroying human rights and democracy.” Fight for the Future had helped organize opposition to the original language.

Of course, conservative opposition to taxation is itself deeply rooted in perfectly defensible small-government ideas. But it certainly feels like cheating to effectively block the enforcement of democratically imposed rules by refusing to pay the cops on the beat. Redirecting those cops from our society’s wealthiest to an emerging industry, furthermore, contradicts the fundamental premise of conservative resistance to taxation: That the private sector can create prosperity most effectively if it’s left alone.