A Good Time to Talk Taxes

Tax season has arrived. It is a good time to explore debates over how much we fund the IRS. Before, when I was on Team Republican, I opposed the idea of increased funding for this government agency. On this matter, I’ve changed my mind.

Funding for the IRS has dropped over the last few decades. This decrease has led to an agency with fewer staff. According to data from the Congressional Budget Office, the IRS enforcement division was cut by about 30 percent since 2010, and an analysis of IRS numbers by Scott Hodge of the Tax Foundation reveals that the number of employees has dropped from 116,673 in 1992 to 75,773 in 2020. Five former IRS commissioners write that there are fewer auditors than at any time since World War II.

One could argue that the drop in staff is not a big deal because of increased productivity. But when it comes to technology adoption, the IRS has been stuck in the 20th century (IRS employees manually keystroke information from paper tax returns), which helps explain why the IRS had an enormous paper tax return backlog in 2022. When journalist Catherine Rampell took a trip to a tax processing center in Austin, Texas, she found computers operating on an obsolete programming language called COBOL. For years, the IRS has needed funds to modernize its systems and to pay for more staff so taxpayers can’t have their phone calls answered. (Of the 282 million calls the IRS received in 2021, only 32 million were answered.) Thankfully, due to increased funding provided from the Inflation Reduction Act, which increased the budget of the IRS by $80 billion over ten years, the IRS has invested in new technology and hired 5,000 workers to staff phones. Reports are that the agency has answered 88.6 percent of its phone calls during this tax season.

Marc Thiessen, a former George W. Bush speechwriter, wrote that the Inflation Reduction Act would create a “new army of tax collectors.” Thiessen pointed out that this “army” would be over six times times the size of our border patrol. Thiessen is right to lament the fact that we need to hire border agents, which has just 19,536 people trying to handle a horrendous border crisis. But the increased funding of the IRS could help close the tax gap, and, in the long run, enable Congress to allocate even more funds toward border security. (For the record, I think the border crisis is one of the most important issues facing our country. It is another area where I’ve changed my mind.)

The tax gap is large. The IRS estimated that an average of $441 billion of the taxes owed annually between 2011 and 2013 was not paid in accordance with the law. Fred Goldberg, IRS commissioner in the George H.W. Bush administration, and Charles Rossetti, IRS commissioner in the Bill Clinton and George W. Bush administrations, argue that the gap is even higher; they believe that the government should be able to collect 1.4 trillion over 10 years from people in the upper income brackets who don’t pay all their taxes. Meanwhile, the Treasury Department has estimated that the net tax gap could amount to $7 trillion over the next decade.

While I’ve changed my mind about funding of the IRS, in some respects, my views are the same as when I worked at the Heritage Foundation and on John McCain’s presidential campaign. Given a choice between hiring more IRS agents or creating a simpler tax code, I’d much prefer that we devise a very simple tax system, as a simple tax system would lead to less tax avoidance.

Complexity is a hidden tax that rewards rich people who can hire the best lawyers and accountants. Americans will spend more than 6.5 billion hours complying with IRS tax filing and reporting requirements in 2022. Meanwhile, researchers at the non-partisan Mercatus Center at George Mason University estimate that Americans spend $313 billion in lost productivity complying with complex tax laws. Then there is the fact that lobbyists spent nearly $28 billion petitioning federal, state, and local governments for policy preferences between 2002 and 2011.

Preferably, I would like to see a flat tax. Not only would a flat tax would close the tax gap and reduce non-compliance by making it easy for households to complete their taxes. A flat tax would incentivize individuals to save and invest. By increasing incentives to engage in productive economic behavior, it would also boost economic growth.

Of course, a flat tax will never be implemented. A complex tax code is here to stay. But if we are going to have a complex tax code, we should enforce it. Efficient and accurate tax administration is essential. Biden and the Democrats were right to properly fund the IRS.