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Neil H. Buchanan

Is the IRS the Most Trustworthy Agency in the Country? Even Republicans Seem to Think So


Thursday, March 11, 2010

As the United States moves on after the recent suicide bombing attack on an IRS office building in Austin, Texas (which I discussed in my most recent FindLaw column), it is an appropriate moment to think about the role that the IRS and its employees play in America today.

In the wake of this contemptible action, the House of Representatives passed (by a vote of 408-2) a resolution introduced by Rep. Lloyd Doggett, a Democrat who is one of the three Congressman representing parts of Austin, condemning the attack and honoring both the victims and the first-responders. This is, of course, a very good start. Calling a terrorist act what it is, without ambiguity or apology, is important in attempting to expose and reverse the trend of violence and hatred that has recently intensified in this country.

My argument in this column, however, goes well beyond the defensive claim that "IRS employees shouldn't be demonized," or the contention that "Taxes are bad, but we shouldn't abet violence," or other minimal responses – even though both of those statements are clearly true.

Instead, my claim here is that, if one looks carefully at the role that the IRS is repeatedly asked to play in our society, it is evident that politicians across the political spectrum at least implicitly understand that the people who enforce our tax laws are uniquely capable professionals who do their work extremely well. Moreover, politically-motivated attacks on the IRS, especially calls to shut down the agency entirely, are simplistic and dangerous. We need to have an agency to collect taxes, and we should be glad that we have one that is as good as ours is.

Putting Social Policy Into Action Through the Tax Code: A Bipartisan Strategy

In response to an uptick in inflation in the early 1970's, President Nixon imposed a "wage-price freeze," intended to stop the momentum of price increases that threatened the long-term health of the economy. This policy change required the White House to create a new administrative structure to deal with the complexities of price controls, which had not been imposed since World War II.

With time short and a pressing need to find capable, trustworthy, and experienced personnel, the President turned to what might seem an unlikely agency: the Internal Revenue Service. The new program was, in fact, administered to a significant degree by IRS employees "on loan" from their home agency. Although those government workers were not trained in (nor did they have any experience with) the nuances of price controls, their financial and accounting expertise – and, perhaps most importantly, their experience in dealing firmly but fairly with special pleading – made them the best choice for the President's needs.

This example nicely illustrates the kind of implicit trust that IRS employees have earned. Even so, Nixon's strategy was highly unusual in that it required an extra step: After creating an agency outside of the IRS, it was necessary to move IRS employees over to the new agency. It is far easier simply to run a given program directly through the IRS. And that, in fact, is what has happened with increasing frequency over the last several decades – no matter which party controls the White House or the houses of Congress.

Both Presidents Bill Clinton and George W. Bush were especially fond of creating "tax credits" to achieve their policy goals. Doing so had the political advantage of being called a "tax cut," rather than "government spending." Make no mistake, however, transferring money to people who engage in favored activities is government spending.

Despite the misleading labeling, the political payoff from creating tax credits and other tax advantages has not been lost on the Obama Administration. During the primary campaign in 2008, after then-Senator Obama had emerged as a serious candidate, he made an appearance at a major Washington think-tank to announce his views on taxes and economic policy. His proposals were a familiar laundry list of additional tax credits and narrowly-targeted proposals that would be administered through the tax system. Although the types of policies he proposed were different from those of George W. Bush, his method of delivering those benefits was the same.

Just to give a few examples of the types of benefits that can be (and are) regularly administered through the tax code, consider a recent proposal in the Senate known as the "American Workers, State and Business Relief Act." Among many other things, the bill would use the tax code to move money toward restaurant owners and retail store owners, companies that continue to pay employees who are serving in the military, users of renewable energy, teachers who spend out of pocket on school supplies, and on and on.

Subsidizing Our Policy Choices Directly

Many tax-policy scholars have become worried about this proliferation of benefits that are run through the tax system. The concern is not generally with the content of the benefits – Who could oppose reimbursing schoolteachers for buying supplies with their own money? – but with the strategy of enacting every policy preference through the tax code. It is arguable, in fact, that the tax system's infamous complexity is largely driven by this explosion of specially-targeted provisions that cloak subsidies in the guise of tax cuts.

While there are plausible grounds on which to attack the use of tax benefits to address every social ill, however, the argument is not that simple. When we think about how to administer any benefit that the government might choose to enact into law, we must ask who is best equipped to deal with the line drawing, enforcement headaches, and administrative complexity that any benefit program will entail.

We could, for example, run the benefit for renewable energy through the federal Department of Energy, the small business subsidies through the Department of Commerce, and the benefit for schoolteachers through the Department of Education. Other than grouping things in a thematically intuitive way, however, what would be gained? We already have an agency that deals with the drawing of lines (often interpreting extremely vaguely-written laws), that has well-established internal and external appeals processes, and that already has in place the administrative structure necessary to keep track of millions of pieces of information.

Whom Do You Trust With Difficult Work? The Best Workers

It is no wonder, then, that even the most anti-IRS Members of Congress rarely even think about how much their favored policies rely on the expertise of the IRS. While no Congressperson may have stood up and said, "I want to run this program through the tax system because I respect and trust the IRS so much," their actions speak volumes. Even if some in Congress happily bash the IRS in their speeches, they are evidently not so worried about the agency that they are willing to pass up the political advantage of calling their spending programs "tax cuts."

The use of the tax code to subsidize behavior, moreover, is not limited to small-bore items like those listed above. Nor, for that matter, is the general strategy of using the IRS to administer important social programs a modern idea. As a nation, for example, we have been dedicated for decades to the ideal that individual homeownership is a worthy goal that should be as universal as possible. We have always tried to make that goal a reality, and we have done so almost exclusively through the tax code.

We could have carried out our national pro-homeownership policies directly through federal spending programs. For example, we could have created a "mortgage subsidy board" that would send homeowners checks to offset some fraction of their monthly interest payments on their home loans. We could similarly have created a "state and local tax reduction board," to send checks to homeowners when they pay their property taxes. A "retirement home sale bonus" could pay homeowners who sell their homes at a gain, to help them pay income taxes on the income that they receive.

Healthcare could also have been subsidized directly through a spending program. Rather than exempting employer-paid health insurance premiums from income tax, we could simply send people checks to help offset their costs. All of the other tax benefits associated with health savings accounts and countless other partial benefits are not "naturally" part of the tax system. We have simply grown accustomed to treating them that way.

In each of these cases, we have decided to provide the subsidies through the tax system. IRS employees are thus asked, for example, to ponder what Congress meant when it allowed a tax deduction for certain medical expenses, and defined medical expenses as "amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body," or what Congress wanted to say when it allowed a special tax benefit for those who sold their homes "by reason of a change in place of employment, health, or … unforeseen circumstances."

To call these provisions ambiguous is a laughable understatement. Even so, the IRS has been soldiering on over the years, having been ordered by Congress to administer these and other obscure provisions. If we want to reduce the reach of the IRS (or eliminate it entirely), then we had better be prepared to think about who will pick up the slack.

Eliminating the IRS Would Mean Reinventing a Very Expensive Wheel

Those politicians who rail against the complexity of the tax code and the reach of the IRS's authority thus need only look at themselves in the mirror to find who is to blame. Nevertheless, some politicians claim that they would like to shut down the IRS entirely. One prominent Republican congressman would shut down the IRS as part of a plan to replace the income tax with a consumption tax. However, although he apparently does not acknowledge as much, any tax (including a consumption tax) will need to be enforced, and the enforcers will need to be drawn from a particular agency or institution. If that agency is not the IRS, what will it be? Maybe we could simply re-label the IRS the "Not-IRS" and be done with it.

In other words, the IRS currently carries out many difficult and thankless duties that would not go away even if we moved those duties outside of the IRS. If some would like to reinvent the wheel, squandering the expertise and experience of our current IRS professionals, and spending billions of dollars to start a new tax agency, then they should say as much in clear and unambiguous terms.

It is not just the federal government that would be affected by moves to reduce the IRS's authority or limit its reach. State governments rely heavily on IRS expertise and fact-gathering capacities, and it would be a loss of "economies of scale" of historic proportions to try to fragment and shift that authority to more than 50 sub-national tax collection authorities. To move to a decentralized system, moreover, would increase the complexity of the system and thus increase the likelihood of inter-agency errors (also known as "red tape") and even of corruption. The states, which are currently experiencing extreme fiscal hardship, would be left to pick up the pieces of a system that was not broken until Congress thoughtlessly smashed it with a sledgehammer.

It would be foolish to describe any organization – public or private – as perfect. Yet it remains true that the IRS is an agency that has been saddled with extraordinarily difficult work, and exposed to public scorn and ridicule (and worse), and yet it efficiently carries out an impressively broad range of the policy choices that emerge from our political system. Seriously changing the IRS's role (or eliminating it entirely) would not only be pointless, but expensive and self-defeating as well.

Neil H. Buchanan, J.D. Ph. D. (economics), is a Visiting Scholar at Cornell Law School, an Associate Professor at The George Washington University Law School, and a former economics professor.

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