The IRS Needs Tax Reform Not a Bigger Budget

July 03, 2014

Washington Post columnist Catherine Rampell says “right now, the IRS desperately needs a champion.” Further, she says, “Our country’s fiscal future — not to mention taxpayers’ collective mental health — depends on it.”

Rampell is among a growing number of pundits and think tank types who say Congress should “stop starving the beast of the IRS.”

Her reasoning is that the IRS is being asked to do more with less.

“Since 2010, when Congress first began hacking away at discretionary spending, the bureau’s funding has fallen 14 percent, in inflation-adjusted terms, according to the Center on Budget and Policy Priorities. Its staff has also shrunk by about 10,400 employees, or 11 percent, over the same period. These cuts have come even though the agency’s responsibilities and workload have increased, thanks to new laws such as the Affordable Care Act and the Foreign Account Tax Compliance Act, as well as the growing problems of identity theft and tax refund fraud.”

Let’s separate the issues here. First, the IRS needs fewer employees because we taxpayers (and technology) are doing their work for them. Of the 145 million individual tax returns filed in 2013, some 121 million, or 83%, were filed electronically. When you add in all the other returns filed electronically by business, estates, and non-profits, a total of 151 million returns were filed in this manner in 2013.

Back in the days when we all filed paper returns, the IRS had armies of people to enter our information into their system by hand. Technology and software such as TurboTax have made those people obsolete. To complain about this is like fretting about the disappearance of operators at Ma Bell.

I agree with Rampell that the IRS has too many responsibilities, and have testified about this problem numerous times before the Finance Committee and Ways and Means. But as I said then the solution is not more funding, but fundamental tax reform.

I’ll repeat here what I told those committees.

Over the past two decades, lawmakers have increasingly asking the tax code to direct all manner of social and economic objectives, such as encouraging people to: buy hybrid vehicles, turn corn into gasoline, save more for retirement, purchase health insurance, buy a home, replace the windows in that home, adopt children, put them in daycare, take care of grandma, buy bonds, spend more on research, purchase school supplies, take out huge college loans, invest in historic buildings, and the list goes on.

In too many respects, the IRS has become an extension of, or substitute for, every other cabinet agency – from Energy and Education to HHS and HUD. But perhaps the most troubling development in recent years is that the efforts of lawmakers to use the tax code to help low and middle-income taxpayers has knocked millions of taxpayers off the tax rolls and turned the IRS into an extension of the welfare state.

The U.S. tax system is in desperate need of simplification and reform. The relentless growth of credits and deduction in the code over the past 20 years had made the IRS a super-agency, engaged in policies ranging from delivering welfare benefits to subsidizing the manufacture of energy efficient refrigerators.

I would argue that were we starting from scratch, these are not the functions we would want a tax collection agency to perform. Tax reform would return the IRS to its core function—simply collecting revenues to fund the basic operations of government.

 

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