OPINION — Washington, D.C., frequently gets wrapped up in debates over the tax code. Proposals for new wealth taxes, changes to marginal tax rates, or adjusting the estate tax capture the imagination of policy wonks. But such discussions often overlook the most important aspect of these policies — how the tax code is administered.
In practice, these administrative issues could make or break any attempt at reform, as well as the tax code as a whole. In a new paper for the Bipartisan Policy Center released today, Bill Gale, Jeff Trinca and I point to three fundamental issues with our tax system.
First, our tax system is too costly to comply with. Americans spend too much time, money and energy each year trying to understand and follow the tax code. By my estimate, the total economic loss (the costs of complying, lobbying and changed behavior) from the tax code may be up to a trillion dollars per year. This estimate was before the Tax Cuts and Jobs Act of 2017, which has caused new confusion for many filers and may have made the code more complex.
Second, compliance is especially hard for filers claiming the Earned Income Tax Credit, an effective pro-work and anti-poverty program that I’ve advocated for improving. The EITC has a web of complex eligibility rules that can be hard for potential claimants to navigate and prove that they meet. How would you go about proving to the IRS, for example, that your child lived with you for at least six months last year?
Furthermore, lax oversight allows some fringe tax preparers to prey on low-income filers, which drives a significant share of improper EITC payments and can lead to penalties for the filer.
Third, it is too easy for some filers to evade their taxes. The most recent estimate, for 2008-2010, is that about $406 billion in taxes each year goes uncollected. Tax fraud crops up in cases like the recent college admissions scandal, contributing to Americans’ general sense that loopholes and offshore accounts make it too easy for some taxpayers to wriggle out of what they owe. Ultimately, this shortfall must be made up for by those of us who do pay our taxes.
Overworked and underfunded
One underlying cause of all three issues is that Congress has chronically underfunded the IRS, reducing their budget by more than 15 percent since 2010. While to some this may sound like good politics, a lack of staff and resources hinders the agency’s ability to catch tax cheats and to provide taxpayers with high levels of support, resulting in longer telephone wait times for taxpayers seeking assistance and only 0.5 percent of all returns audited in 2016.
Former IRS Commissioner John Koskinen estimates that up to 40 percent of the IRS workforce could retire this year, which will only further diminish the agency’s institutional knowledge and ability.
To tackle the above issues, one broad reform that some have advocated would implement a “return-free” system, under which the IRS would prepare tax returns for Americans.
My co-authors and I argue that such a system would be unrealistic in the present day. While it would reduce the burden on taxpayers, a return-free system could not cover a substantial portion of filers without significant tax simplification, a solution to the IRS’s long-term issues, and improvements to the taxpayer appeals process.
Under the current tax code, any potential return-free filing system would only cover those with the simplest returns (so no EITC claimants, no Uber drivers, etc.) — in other words, those who least need help preparing their taxes.
Time for a change
Regardless, my co-authors and I lay out several paths for reform. Some of these would simplify the system and strengthen programs like Volunteer Income Tax Preparation Assistance, reducing confusion for low-income filers and helping them accurately file their tax returns and receive any benefits they are eligible for.
Additional suggested reforms would improve the IRS, its staffing and training of personnel, and its processes — for example, applying behavioral nudges to improve compliance, as successfully demonstrated in other countries.
Some of these fixes are starting to gain traction. A recent Government Accountability Office report details recommendations to tackle the IRS’s staffing challenges, while the recently reintroduced Taxpayer First Act of 2019 permanently authorizes VITA and calls for a fundamental restructuring of the IRS.
None of these proposals is a panacea, and they are just a start toward fixing the longer-term problems facing the U.S. tax system. As attention is called to these issues, Congress should continue to work toward tax administration reforms that will lower costs, improve the experience for filers and prevent evasion.
The Bipartisan Policy Center is a Washington, D.C.-based think tank that actively promotes bipartisanship. BPC works to address the key challenges facing the nation through policy solutions that are the product of informed deliberations by former elected and appointed officials, business and labor leaders, and academics and advocates from both ends of the political spectrum. BPC is currently focused on health, energy, national security, the economy, financial regulatory reform, housing, immigration, infrastructure, and governance. Website | Twitter | Facebook
Jason J. Fichtner is a fellow at the Bipartisan Policy Center and associate director of the Master of International Economics and Finance program at the Johns Hopkins University School of Advanced International Studies.