Friday, April 24, 2015

Pummeling the IRS Instead of Actually Simplifying the Tax System

by Neil H. Buchanan

In my new Verdict column, published yesterday, I describe the political strategy that Republicans have been using for the last generation or so, wherein they set the IRS up for failure, watch it fail, and then use that failure as an excuse to cut the IRS's budget even further, setting up the next round of failure.  Obviously, I did not imagine that I am the only person to have noticed this pattern, but after I wrote the piece, I was surprised to discover that my column's title ("The Republicans’ Cynical Tax Game: Undercut the IRS, Blame the IRS, Repeat") was eerily similar to a sentence in a column in Forbes magazine last December ("It is a cynical recipe for a self-fulfilling disaster: Give the agency more and more work. Cut its budget. Blame it for failing to do its job. Repeat.")  Not as surprised as I was to see that Forbes would publish such a column, but still surprised.

My column also ran through three of the common right-wing arguments about why people should hate the U.S. tax system -- which, to be clear, need not and should not be an excuse for beating up on the agency that tries to administer that tax system.  I show that the overall level of taxes in the U.S. has not been going up (in fact, it has been amazingly stable since the end of the World War II), that the U.S. remains one of the lowest-tax countries in the developed world, and that the U.S. tax system is barely progressive and thus is not engaging in a makers-to-takers redistributive plan.  Not that there would be anything wrong with that!

As it happens, the Republicans were pouring more gasoline on the anti-IRS fire at almost exactly the same time that I was writing my column.  The majority staff of the House Ways & Means Committee (now chaired by Rep. Paul Ryan) issued a report earlier this week claiming that the IRS "deliberately" allocated its budget in a way that harmed customer service.  Now, therefore, the claim is that the IRS does not just do its job poorly, but Republicans would have us believe that the IRS's leadership is deliberately making matters worse.  I am working on a new column to debunk those claims, which I hope to publish soon on Verdict.

In this toxic environment, it is difficult to believe that the Republicans would be interested in trying to make the IRS work better.  The political advantage lies in keeping the IRS wounded, and making people think that it is the Democrats' fault that things are not working smoothly.  Even so, there are very sincere people who have offered helpful ideas that could truly make a difference, and whose honest efforts I admire.

For example, tax professors Jon Forman and Roberta Mann (of the law schools at the universities of Oklahoma and Oregon, respectively), have a working paper up on SSRN, "Making the Internal Revenue Service Work," that says, in essence, "Well, if Republicans are not going to fund the IRS at its previous levels, here are some good ideas about how to make things work better in a lower-budget environment."  Similarly, at the recent Critical Tax Conference at Northwestern (see my recent Dorf on Law post here), Professor Danshera Cords of Albany Law School offered some useful ideas about how to improve matters at the IRS.  During Q&A, I said to Professor Cords what I will surely also say to Professors Forman and Mann when they present their paper at the Law & Society conference next month in Seattle: "The declining performance of the IRS is not a problem that the Republicans want to fix.  The whole point is to gum up the works, to accomplish tax reduction for the rich by deliberately reducing and diverting the resources needed to enforce the tax laws, and to undermine public support for tax collection."

The grandaddy of all good-faith efforts to improve average Americans' experience with taxes, however, is a still-not-completely-abandoned effort, led by Professor Joseph Bankman of Stanford Law School, to make it unnecessary for the vast majority of taxpayers to fill out tax returns at all.  The idea is that the IRS already receives from your employer and your financial institutions the information that you are required to enter into your tax forms.  Why not have the IRS send you a pre-filled tax form, containing that information and performing the necessary calculations, and allow you to avoid all of the aggravation that makes people hate the IRS?  All we would have to do is create a way for people to contest any errors and to provide any additional information, but even the people who interacted in that way with the IRS would end up doing less work than everyone currently does when filling out these utterly unnecessary forms.

Professor Bankman actually oversaw a pilot version of his idea, Ready Return, in California in 2005.  The program was hugely popular.  Unfortunately, the makers of tax preparation software packages, especially Intuit, have engaged in a lobbying blitz that successfully killed the program in California, and no other state government has even considered fighting that fight ever since.

Last week, the technology writer for The New York Times wrote an interesting piece about Bankman's idea.  Tellingly, however, the title of the article was "Would You Let the I.R.S. Prepare Your Taxes?"  Despite the article's fair reporting, and its extensive quotations from Professor Bankman (and from UC Davis Professor Dennis J. Ventry, Jr., who is also engaged in this admirable battle), the tone was unmistakably about not trusting government bureaucrats to do anything right.  (I was especially surprised a few years ago when Professor Bankman told me that the State of Maryland -- with all of its DC suburbs filled with government workers, who would hardly be a good audience for anti-government rhetoric -- had dropped all plans to run a state Ready Return program.)

Again, "Would you let the IRS prepare your taxes?" is a non-issue.  The IRS already computes your taxes.  That is why it would be so simple for it to send people pre-filled forms.  Even so, one can imagine reasonable questions being raised.  At the end of the article, the reporter notes that some people have objected that people would not dare challenge the IRS's computations.  After accurately reporting Bankman's argument that "the IRS might include tax breaks that taxpayers wouldn't have otherwise found," the reporter offered this parenthetical: "Critics of the I.R.S., which revealed in 2013 that it had targeted conservative groups for special scrutiny when determining tax status, scoff at this idea."  Yes, the non-scandal scandal is now (as I suspected when the story broke) simply a conservative touchstone in any debate about the IRS, no matter the reality.

Beyond the odd invocation of the non-scandal scandal, however, there is simply no reason to scoff at the idea that the IRS would ever do anything to help a taxpayer.  Indeed, in two of the last four years, I have received extra refunds from the IRS, after internal cross-checking revealed that I had made errors that overstated my taxes.  These were not, moreover, transcription errors, but a matter of having failed to note my eligibility for lower tax rates on certain categories of my income.  (Yes, even tax law professors make mistakes on their tax returns.)  In both cases, the IRS generated corrected forms, sent me those forms along with checks for the overpayments, and provided me with further explanations of what to do in the future.

Moreover, Congress always has the ability to require the IRS to err in the taxpayers favor.  I do not think it would be wise to do so, but Congress could certainly set up a Ready Return-like program in any way that it liked, including setting up default rules that would make it more likely that taxpayers would be happy with what the IRS calculates.  In other words, there is nothing about this system that need be stacked against the taxpayer.  Congress, not the IRS, ultimately decides how complicated and difficult the system is.

Again, however, that is really the point.  Back in the 1990's, then-House Majority Leader Dick Armey (who until recently ran a conservative super-PAC) proposed eliminating tax withholding from people's paychecks.  His argument (directly echoing conservative icon Milton Friedman) was that paying taxes should be as painful and difficult as possible, and withholding makes paying taxes easy and painless.  I do not know whether Milton Friedman would have extended his argument to suggest that we should deliberately make a government agency as dysfunctional as possible, but his political acolytes have certainly embraced that idea.


David Ricardo said...

The idea of an IRS prepared return is an excellent one of course, but in addition to the opposition of for profit tax return services the tax system itself would have to be heavily revised if such a program were to be applicable for anyone other than the very simplest of returns. Here are just a few of the problems.

1. Itemized deductions: While some deductions are reported, others such as charitable contributions, property taxes and the like are not. In addition, state tax deductions are also an issue. So the only returns that could be IRS prepared are returns that use the standard deduction. And even if taxpayers used a standard deduction one year that does not mean they would use it in future years.

2. Minimum Required Distributions from retirement accounts: The law currently allows a taxpayer to take the distributions disproportionate from various accounts. And taxpayers who start taking RMD’s have the option of taking the first one in the following year. So a lot of work has to be done here, otherwise those subject to RMD’s are going to be excluded.

3. Taxpayer status: This may change during the year, death or divorce can significantly alter the type of return a taxpayer files.

4. Capital gains: Basis is generally not reported for purchases more than a year old. Heck in many cases basis is not known and must be estimated.

5. Sched C income and expenses: No way to get this automatically into the system, it must be manually entered

So at the end of the day very few taxpayers could have their returns correctly prepared by the IRS. And if partial returns were prepared many taxpayers would not know they had to provide additional info or how to check the info in the return and a large number of returns would be incorrect.

Support for IRS prepared returns exists primarily among those not associated with the actual work of preparing returns. Those of us who practice in the tax arena know that such a system could work, but only if there were major changes in the tax laws, reporting requirements and computer data systems.

David Ricardo said...

Also, the modus operandi that Mr. Buchanan has nicely documented here is not limited to the IRS. The Republicans are using the same strategy with respect to public education.

The process is simple and similar. They denigrate the public schools and use that commentary as a rationale for reducing school budgets and diverting funds to private, in many case sectarian schools. This of course makes the public schools perform even worse, resulting in more diversion of funds, less performance and the process repeats itself.

The end result, the destruction of public education, the allocation of tax dollars to religious schools, the end of public school employee unions and a left behind group of mostly poor, mostly minority students who have no real opportunity to succeed.

Shag from Brookline said...

Check out Robert J. Samuelson's column in today's WaPo "The GOP estate-tax folly." I was pleasantly surprised, in fact, shocked, that Samuelson finally made some sense about this lame attempt at tax "reform."