Monday, November 13, 2023

Topic: Policy
Content Type: Opinion
Keywords: IRS, deficit, governance

Republicans Should Be Party of Law Enforcement

Republicans Should Learn to Stop Hating and Love the IRS

Key Takeaways

• The IRS desperately needs reform
• Republicans should support the mission of enforcing the law
• Republicans should step up and fix it
• Many conservative approaches to making it better

The Republican Party is the Party of Consistent and Fair Law Enforcement

While the Republican Party has changed over my lifetime, it remains the party that represents the value of law enforcement. Still, the 1980s-2015-type Republicans among us should push for vigorous enforcement of law in all arenas--violent crime, non-violent crime, immigration, and tax payment.

Republicans should push for vigorous enforcement of law in all areas.

Obviously the enforcement of tax law conflicts with the Republican preference for lower taxes, but it also aligns with the (ostensible) Republican call for lower deficits. I want lower taxes and lower spending, but a person has to set priorities, and adherence to the law is a core principle. It's a valuable principle, too, as it can be used across the political battlefield.

What's Wrong with the IRS

The IRS is the least popular government agency in the country. It's no wonder that Republicans use it as a political punching bag. No government agency is more synonymous with excessive and unwelcome investigations into personal lives than the IRS.

The Republican Party should be the party of small, effective government.

In many respects, their disrepute is well-earned. On a basic level, they take a magnifying glass to your capacity to follow the byzantine rules that make up the 75,000 page tax code. If you spent your entire workday reading tax code, and could read one page of the impenetrable language per minute (you can't), it would still take you two and a half months of full-time dedication to finish. No one understands the tax code in full, and yet the IRS expects you to.

Side note: Donald Rumsfeld sent a letter to IRS every year that is worth reading.

But even beyond the basic problem underlying the IRS, they still manage to go out of their way to make themselves less popular. For their review and recovery processes, they target low income Americans, the least able to afford external tax expertise and with the most to lose from additional taxes. The IRS targets them because it's more convenient for them and they get more tax recovery bang for the enforcement buck.

If my own experience is any indication, the IRS is just bullying Americans into paying them more money, relying on their poor understanding of the tax code, their expectation that the IRS must be correct, and their lack of resources and pugnacity. I can recall three instances in my life where the IRS sent me a letter claiming my tax return was incorrect and I owed additional money. It was wrong each time.

I have always done my own taxes. I'm an economist, a policy person, and a do-it-himselfer. While that may have increased the chances I did something wrong, it also provided me the opportunity to learn about the tax code and the process. And also, when the IRS came knocking, to be able to double-check their math/identify my own mistake. Of the three instances, I only found one mistake, and it was a mistake that caused me to pay more than I owed. I can't tell you how much I relished writing the response letter telling them they owed me money.

Lastly, my stepfather received a letter from the IRS last year claiming he owed them more than $10,000. He had hired a new tax person, and he had reconfigured his filing status with my mother to save on Medicare premiums, so he reacted the way everyone reacts when they receive such a letter--terrified that he'd have to pay. I didn't know enough about his situation to say one way or another, but I did tell him that the IRS was 0 for 3 when sending letters saying I owed them more. Sure enough, he spoke with his tax filer, and was assured that he didn't owe any additional money.

My stepfather and I both have the resources to double-check what the IRS says, but for many Americans, that's not an option. I fear the IRS is acting like the private companies that knowingly tack on fees to your bill that you don't owe, cynically betting that their customers won't look or won't want the hassle of arguing and just paying up. Imagine this same organization writing the program that tells you how much you owe!

In addition to the above, the IRS has notoriously terrible customer service. This is a problem that everyone's aware of, and has already seen some improvement since the IRA passed. In my most recent experience, it took a year and a half, dozens of phone calls (most of which never went through), an in-person meeting with the IRS, and the assignment of a taxpayer advocate before my issue was resolved. The taxpayer advocate was completely useless. He called me one time, said there was a discrepancy that I should check and he'd call me back in two weeks. He didn't. So I called him. He never answered his phone nor called me back. I never spoke with him again.

The in-person agent seemed productive at the time. She determined that there was some discrepancy between the Social Security earnings reported to IRS versus on my W2 (in the amount of one penny). She said the problem was resolved, but still nothing happened. Finally, I tried to schedule another in-person meeting (while also sending letters and reaching out to the taxpayer advocate), and the IRS meeting scheduler said that she would resolve the issue and I'd be paid within the month, which actually happened. I'm still not entirely sure what the problem was, as the only person who gave me a specific answer was the one in-person agent, but no one ever confirmed it, and I never saw the discrepancy myself. No person should have to jump through this many hoops (without even knowing what the issue is!) just to reach some resolution.

Finally, on top of all the bureaucratic problems, there's a dangerous politicization occurring, too, like in many government agencies. Erstwhile Democrat '>Matt Taibbi appears to have been specifically targeted, while less well-known people are inexplicably accosted by power-high agents. Then you have politically motivated activists with access to IRS data illegally leaking private tax returns so sympathetic journalists can write data-heavy stories about how the rich aren't paying their fair share.

Ideas to Reform the IRS

So what is to be done? As with many subjects, Republicans have no over-arching plan to resolve this. They prefer to focus on short-term political wins derived from criticizing the IRS's worst behaviors without offering any ideas for a long-term solution.

Should the IRS be torn down and replaced with a better-run institution? The name of the organization doesn't much matter to me, only the structure, its incentives, and its behavior. This is a question better left to marketing gurus.

Self-Funding

Every day claims are made that giving the IRS money produces more money than it costs. This is because they spend their money recovering money from tax cheats. It's a reasonable argument, and could be true, but I'm skeptical about the magnitude of the revenue generation that's advertised.

Even for tax recovery, there's a sort of laffer curve. The researchers and CBO believe we're on the left side of the Point of Optimality. But because of this relationship, the IRS could potentially be self-funding. To be sure, this shouldn't even need to be discussed, because both parties should support tax enforcement to the extent that it produces revenues, and there shouldn't be a tug of war about it.

According to a recent study that the pro-tax-enforcement crowd are waving around, the average audit costs the IRS $6,418, and the average recovery is $13,930. This 2 to 1 ratio seems in line with what CBO says reducing IRS enforcement budget would do to revenues. According to IRS, they audited 708,309 tax returns in FY2022. As long as the average recovery is greater than the average cost, the entire IRS enforcement budget could be self-funded. This would allow for more division, and Congress could separately fund customer service.

Good Governance Measures

The downside of this is that Congress could no longer use the purse strings to manage IRS abuses, but the current system is not working, and needs to change. Congress should instead empower good governance panels.

Given the myriad abuses described above, Republicans (and Democrats) have an obligation to stand up institutional safe-guards. The current safeguards like the IRS inspector general and Congressional Oversight are clearly not enough. There's a lot of room for compromise here. The Democrats want to pursue high income tax absconders and surely want a good experience for taxpayers, and Republicans (should) want appropriate tax enforcement, increased revenues, good governance and fair treatment.

Customer Service - The IRA increased funding for customer service, which seems to have made some difference. The most important metrics should be geared towards reducing wait-times for enforcement actions. Taxpayers should not be spending months and months in limbo waiting for the IRS to get back to them. Congress should require reporting these metrics. Letters sent. Time to completion. Percentage that were correct.

Internal Incentives - IRS agents have several problematic incentive structures. One is to exaggerate the tax obligation of taxpayers. Whether they are low-income or high-income. The other is to behave in ways that elicit sympathy and additional funding from Congress. In the days prior to the IRA, the IRS was complaining about how out-dated their tech was and how it was making them inefficient. Few pundits pointed out that the IRS has an incentive to be inefficient because then they can ask for more money. Similar incentives exist with customer service. More efforts should be made to make sure the IRS isn't gaming the funding mechanism. This is one problem that self-funding could solve. The private sector continuously updates its technology by approximately the amount that is cost-beneficial. That the IRS is decades behind in tech, suggests to me, not that they don't have the funds to update, but they don't have the desire to.

Congress should also stand up several watch-dog groups, or at the very least to mandate reporting on certain topics. There should be a team of economists charged with assessing the IRS recovery efforts, their recovery to cost ratio. They should pre-register their plan, and then be given carte blanche to study it. It should be done periodically to assess where on the tax recovery laffer curve the IRS is.

There should be a panel also that's reviewing how IRS is conducting its recovery process and there are no dimensions of unfairness. Recent experience was that the IRS focused its enforcement efforts on low-income EITC participants. Ostensibly, this was because they provided the highest recovery to cost ratio. There's a logic to that, but there's also a concern that the IRS is focusing its efforts on the least-resourced taxpayers and taking advantage of that. A panel should surely monitor IRS behavior.

Likewise, I think it's arguably unseemly for the IRS to target high-income people, particularly if it's for political reasons, which this announcement is highly suggestive that it is. Even if it's reasonable from other dimensions, the announcement itself makes it seem as though this is a political effort, not a revenue-growing or enforcement one. Not much can be done about this except changing the discussion around IRS.

Competition with IRS?

A market-based solution would have IRS be self-funded, and competing with private tax enforcers. Perhaps this is ultimately unworkable, but such solutions should be explored. After all, the IRS already outsources some of its work to private firms, so doesn't have a problem sharing tax data. Private tax information doesn't even need to be shared, just taxes with names and SSN's censored.

The way it could work is that the Treasury (or the IRS) auctions off blocks of tax-payer returns. Perhaps the blocks are by income, or maybe random. Private companies would bid on them to review and find crimes. The firms could then keep some percentage of the recovered taxes. Depending on the magnitudes, IRS could be self-funded through the bids, or through a portion of the recovery. Obviously, many safeguards would need to be in place, like an appeals process to prevent overzealous private enforcement, but this might be an approach that could restructure the tax enforcement system, improve results, decrease IRS funding, and allow the IRS to focus on customer service and oversight.

Useful Links

GAO Report
Penn-Wharton

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