Should We Enforce Our Tax Code?

I really should have a department for “not knowing whether to laugh or to cry”. That was my reaction to this editorial at the Wall Street Journal on the Biden Administration’s plan to increase the budget of the Internal Revenue Service:

President Biden says he wants to “revitalize” IRS enforcement to target wealthy Americans who “aggressively plan to avoid the tax laws.” No doubt tax avoiders exist. But a lot less money is likely to be found under the sofa cushions than Mr. Biden and progressives think.

The White House is hoping to use this sleight-of-math to help finance its $2 trillion cradle-to-grave entitlement plan. It projects that giving the IRS an extra $80 billion to hunt down tax dodgers will generate $700 billion in revenue over 10 years, citing a National Bureau of Economic Research study that estimates the top 1% of earners fail to pay $175 billion a year in tax they owe.

It’s pretty much what you’d expect. They’re worried about it both because it might not be successful and because it might.

Here’s an example of why I didn’t know whether to laugh or to cry:

All of this explains why the Congressional Budget Office last year projected that a $40 billion increase in the IRS budget over 10 years might only generate $103 billion in revenue.

That actually sounds like a pretty good ROI to me. You?

My own view is that as a matter of general principle we should enforce our laws or get them off the books and I include the tax code in that. How do you know if you’re spending enough on enforcement? When very, very few are cheating. Is that the case now or not? I’m open to argument either way. Two significant problems with our are code are 1) it’s so complicated that nobody really understands it; and 2) it changes to frequently that itself is an impediment to economic growth.

If you cast you mind back you may remember that practically nobody paid their income taxes until after payroll withholding tax was introduced as a revenue enhancement scheme in 1943 ostensibly to help in the war effort. I can testify to that based on my dad’s tax returns (all of which I have). He didn’t start filing until 1943.

I’ve said my piece on taxes any number of times. To summarize:

  • I think the corporate income tax should be abolished because it’s an inefficient tax.
  • I think that FICA should either be abolished (and Social Security retirement payment paid from general revenues rather than the byzantine trust fund) or the cap should be raised to include income right up to the top 1% of income earners (presently $538,926) and automatically adjusted by statute.
  • I think the definition of “capital gains” needs to be adjusted.
  • I think that the personal income tax is marginally better than the corporate income tax but still has some of the same problems.
  • I think we should replace income taxes with a prebated value-added tax levied on all goods and services (see here for how that might work—that’s just one example).
5 comments… add one
  • CuriousOnlooker Link

    I agree a ROI of about 150% (the CBO estimate) over 10 years is good; and it is better to enforce taxes fairly.

    I am weary about two aspects, first is over-promising and underdelivering. I could believe a return of 150% over 10 years, if properly implemented. But a promise of 800% return over 10 years, which so conveniently plugs the 90% of the gap in new proposed spending vs newly proposed taxes, sounds as credible as a pitch for cryptocurrency to me.

    The second is the implementation. It is forgotten now, but the IRS ended up on Congress’s naughty list (which no doubt impeded its ability to enforce the law) after the targeting scandal of 2010-2013. In this even more politicized environment, the incentives for a repeat are greater — since the IRS will collect even more information than it does now. A repeat blows up the ability to gather any extra revenue at all.

    I’m still skeptical that the wealthy are widely not reporting their income vs having lawyers design lawful tax sheltering strategies.

  • first is over-promising and underdelivering

    My general practice is to under-promise and over-deliver which I think explains why I do what I do rather than being a politician.

    In specific response to your remarks about the risks I would only observe that the White House does not have to direct the IRS to abuse its discretion. It’s capable of doing it on its own.

    having lawyers design lawful tax sheltering strategies

    As I’ve said before the real scandal and corruption is not in people doing what’s illegal but in what’s legal.

  • steve Link

    “I’m still skeptical that the wealthy are widely not reporting their income vs having lawyers design lawful tax sheltering strategies.”

    They clearly do both. Switzerland and Panama are just two of the more recent findings and we dont really try that hard to find the money the wealthy hide. That said, I would bet that more money does go into shelters that are somehow “legal”.

    BTW, the CBO numbers are likely under promising. The IRS in its own numbers expects to collect $4 for every $1 spent on collection. Other estimates run about $5-$6 per dollar spent.

    http://www.taxpolicycenter.org/sites/default/files/alfresco/publication-pdfs/2000180-prepared-remarks-of-irs-commissioner-before-tpc.pdf

    Steve

  • CuriousOnlooker Link

    The IRS will of course proclaim tout its own abilities. But I could make the reverse argument that you can cut the IRS by 20% and still generate increasing revenue (which is what happened in 2014-2019).
    This isn’t a linear model.

    Look, Swiss banks and the Panama papers prove out my point. Hiding money overseas is the route the rich would take if they are hiding assets. But foreign bank secrecy ended 10 years ago and they only found 10 billion in fines. Out of the Panema papers they found a shocking lack of Americans involved and to date, only 2 Americans were prosecuted from the leaks. That to me gives credence that people with means shelter their income legally, and stronger enforcement won’t fix that.

    I repeat again, the IRS is going to find 70X the hidden income they found when they broke foreign bank secrecy?

  • Grey Shambler Link

    Rules on deductions are so open to interpretation that most people take advantage of vagaries and deduct by default.
    They inflate and deflate values to their advantage knowing they’ll likely not have an audit and if they should, they only need pay the difference plus a small penalty.
    In fact, accountants and business management have a fiduciary responsibility to do just that.
    But everyone including the IRS knows that, so I imagine tax rates are adjusted to accommodate.

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