As the extraordinarily conservative Republicans in the House (and in the Senate) press to turn back progressive initiatives, the White House and responsible Democrats (assuming there are a few) need to be cautious that they don't concede before they even try to fight and end up dumping out important provisions to appease the right like they did with the "public option" in health care reform.
For example, Obama made a point in his State of the Union address of going along with the demand by small businesses for alteration of the 1099 reporting provision enacted as part of the Health Care Reform bill. See, e.g., Lavante, What President Obama Really Said in the State of the Union Address about 1099 Reporting (Jan. 2011). Businesses complain about any new reporting requirement. First, because they don't want to do any reporting at all if they can get out of it. Second, because they know that information reporting has a huge impact on the ability of small businesses generally to evade taxes by simply failing to report income. Compliant businesses ought of course to support reporting requirements, since they end up paying their taxes in full, while the noncompliant businesses that earn income "under the table" are the ones that benefit when there is no reporting requirement.
Think about this a minute. Businesses inevitably track their invoices and their customers. They know who pays and who doesn't. They know what they've bought and who they've bought it from. It doesn't require much to file that information (already maintained by most modern businesses on computerized accounting programs) in the appropriate forms so that the IRS has the information to match against what various business vendores report as their income. This should therefore be a nonissue: for a small additional cost in the time to do the paperwork, the government will be able to hold businesses accountable in the same way that it holds ordinary wageearners accountable--through the information reports filed by third parties.
Raising the threshold on the amount for reporting or excluding all "small" businesses from reporting would be a bad idea. Small businesses are the place where failure to report income likely adds up because of the ease with which such things can be obscured without third party reporting, whereas large companies have various audit and public reporting requirements that would hinder such failures to report: one has to think that it is a number of those family-owned businesses running sole proprietorships and S Corporations that are evading their responsibility to report their income and causing all of us to have to bear a disproportionate amount of the burden.
Of course, this is a broad issue that relates to reporting by third parties in many different situations. With third-party reporting, the tax gap--somewhere in the range of $200 to $300 billion annually made up of taxes evaded by cheaters--would be significantly reduced, and compliant taxpayers would be restored to equity. Noncompliant taxpayers would no longer garner a tax advantage from simply failing to report their income on the assumption that the IRS would have considerable difficulty figuring out the additional payments they've received. It is a no-brainer, given the way that third party reporting assists in overcoming the problems of assymetry of information faced by the government. See, e.g., United States Government Accountability Office Report to the Committee on Finance, U.S. Senate, "Tax Administration: Costs and Uses of Third-Party Information Returns," GAO-08-266, Nov. 2007 (noted in Citizens for Tax Justice report cited below). But neither the Republicans nor the Democrats seem to be able to see past the hullabaloo raised by people (presumably including a good many of those who profit from the lack of third-party reporting) about "burdensome" reporting.
There are similar complaints about the IRS's proposed regulations requiring banks to report interest paid to foreign accountholders in the same way that they have been reporting such interest for domestic accountholders for some time, in order to be able to comply with our information reporting requirements under treaties. Citizens for Tax Justice notes that the so-called "center for freedom and prosperity" (hereinafter CFP) (often represented by Dan Mitchell of the Cato Institute) has as usual distorted and misrepresented the issue here. See The Tax Cheaters' Lobby is Wrong about IRS Proposed Regulations, CTJ, Jan. 31, 2011. Not only do we have a responsibility to provide information to other governments under our agreements on tax information exchange, but such reporting will likely aid in the ongoing battle to catch flagrant tax cheats who hide as foreigners to avoid paying income tax on earned interest, as CTJ notes.
(Again, one suspects that these are some of the same people who hide money in offshore secret banking jurisdictions and conveniently forget to report the income on it on their tax return. At the recent ABA tax section meeting in Florida, I spoke with a lawyer whose practice includes representation of many of these tax shirks. He estimates that there are more than 250,000 such shirks with "substantial" amounts socked away in offshore tax havens. The right-wing CFP, of course, gathers money from these rich folks and spends it vilifying the efforts to squelch tax havens and tax competition, which it considers a wonderful thing because it permits the extraordinarily wealthy to hang onto "their" property (i.e., avoid contributing taxes to pay for the government that made that property possible). Don't believe anything you read on the "prosperity" center's site--it will almost certainly be distorted by misleading innuendo and misinformation. The CTJ report is an excellent takedown of the many exaggerated and misleading claims made in the "prosperity" center's materials. You can also find a number of my own website where I have reviewed some of their videos and found them to rest on a very shaky foundation of speculation and conclusory assertions.)
The Dodd-Frank financial reform bill included a similar new reporting requirement for broker-dealers. Some experts have concluded that about 25% of those who report capital gains from sales (in most cases, the most affluent amongst us who are making trades in financial assets such as stocks and bonds) have cheated by overreporting basis and thus underreporting gains. That adds up to a huge part of the tax gap. Dodd-Frank raised some revenues by requiring brokers to report basis, providing a third party check against an individual's claimed basis amount. The banks have this information automatically when they conduct trades on stocks or bonds they've sold to the investor and they are gearing up for the initiation of this reporting this year. See Larry Barrett, Broker-Dealers Brace for Cost Basis Reporting, Security Monitor, Feb. 2, 2011.
Of course, in enacting the provision, Congress provided much too much flexibility to investors selling financial assets, by allowing them to specifically identify which of completely fungible items they sell (thus cherry picking the basis that gives them the lowest tax liability). If average basis isn't used (and this is an area of considerable complexity regarding the appropriate rule), then there should be a first in-first out rule that requires investors to be treated as selling their oldest acquired items first. It is hard to see any justification for allowing cherrypicking that has nothing but a tax-minimization goal as its object--these are fungible financial assets that are exactly the same for every purpose other than tax, so recognizing the tax differences as a basis for a tax beneficial election makes no policy sense at all. The identification provision that has been in the Code for a long time should be deleted, and owners of financial assets should not be able to specfically identify consideration received for such items in any context, whether reorganizations (where the Bush Treasury instituted a rule permitting such identification in 2006, claiming wrongly that it was a necessary corollary to their decision to treat a share of stock as the base unit of property in reorgs) or otherwise.
Meanwhile, other provisions in the Dodd-Frank reforms, limited though they were, now face a struggle against a headwind of Republican cost-cutting and business-friendly attitudes. The SEC seems to be suggesting that it thinks it will have to rely on the banks' own self-regulatory apparatus--i.e., it appears to be willing to let the fox watch the henhouse when it comes to the Dodd-Frank fiduciary standard. And the CFTC sees itself needing considerably more resources in order to institute the swaps exchange which is essential to the re-regulation of the swaps market that lay at the heart of the financial speculation carried on by TBTF banks. See Dodd-Frank Tax Battle Coming, Securities Monitor, Feb. 2, 2011. Too many in the new Congress seem to think that the tea party crazies represent the majority of American voters, and are planning a range of truly stupid actions, from failing to approve a new debt ceiling (this, of course, after fighting singlemindedly for hundreds of billions of tax cuts for the extraordinarily wealthy) to failing to fund the regulatory apparatus necessary to give us any hope that 21st century global capitalism can be responsive to democratic, people-centered objectives for society.