I’m not a big fan of the Internal Revenue Service, though I try to make sure that politicians get much of the blame for America’s convoluted, punitive, and unfair tax code.
Heck, just look at these three images—here, here, and here—and you’ll find startling evidence that politicians make the tax system worse with each passing year.
But there is an office at the IRS that ostensibly exists to defend the interests of taxpayers. The Taxpayer Advocate Service is, according to the government website, “an independent organization within the IRS and helps taxpayers resolve problems with the IRS and recommend changes that will prevent the problems.” The head of this office, Nina Olson, has the title of National Taxpayer Advocate.
Sounds good, right?
Well, not so fast. The TAS does some good things, but Ms. Olson spends at least part of her time advocating for the government.
The TAS just released its annual report, and here’s some of what the bureaucracy recommended, according to a Bloomberg story.
Among the other problems Olson identifies in the report are … the underfunding of the Internal Revenue Service … The IRS, which Olson compares to the accounts receivable department of a company, should be fenced off from more budget cuts by Congress, she writes in the report.
Don’t rub your eyes or clean your glasses. You read correctly. The folks at the IRS who supposedly are advocating for you are instead advocating for a bigger IRS budget.
I debunked this silly argument last year, explaining why Congress should reject the Obama Administration’s assertion that more money for the IRS would be an “investment” that would yield big returns.
But I want to be fair. Some of what the TAS does is worth applauding. The report also discusses the grotesque levels of complexity in the code. Here’s more of the Bloomberg story:
The U.S. tax system’s most serious problem is the 4-million-word code’s excessive complexity that makes it tough for taxpayers to comply with and difficult for the government to administer, National Taxpayer Advocate Nina Olson wrote in an annual report to Congress. The tax code cost taxpayers and businesses $168 billion in compliance in 2010… “Lowering rates in exchange for broadening the tax base would be an excellent bargain,” says the report, released today in Washington. “We are confident that in the end, public support for a simpler code will be strong and deep.”
The TAS also produced this very depressing infographic. It’s absolutely disgraceful that complying with the tax code requires the equivalent of 3 million full-time workers. It’s a vast understatement to call this a counterproductive misallocation of labor.
Or how about the fact that just the guidance for the income tax, when printed out, creates a stack of paper more than 12 inches high? And what about the nauseating little tidbit that the tax code has been changed more than once per day since 2001?
No wonder it’s such a corrupt mess. Isn’t it time we rip up the entire tax code and put in place something simple and fair like a flat tax? Here’s my case for real tax reform.
By the way, I’m also more than willing to replace the tax code with a national sales tax, perhaps something like the Fair Tax. I’ve given speeches, testified to Congress, appeared on TV, and done all sorts of things to promote that idea.
But the one huge caveat is that we need to make sure that the politicians don’t pull a bait and switch and stick us with both an income tax and national sales tax. Which is what happened in Europe when governments implemented the value-added tax without repealing income taxes.
That’s why we would first need to get rid of the income tax and repeal the 16th Amendment. But then, because I don’t trust the Supreme Court (gee, I wonder why?), I would also want to replace the 16th Amendment with new language that would be so ironclad that even Chief Justice John Roberts couldn’t fabricate reasons why an income tax could ever return to plague the nation.
But since we can’t even get the votes to approve a watered-down balanced budget amendment, I’m not holding my breath for the day that the Constitution is amended to permanently kill the income tax.
And that’s why I think the flat tax is a safer option.
The worst thing that happens if we get a flat tax is that politicians change their mind and we degenerate back to the current system.
The worst thing that happens if we get a national sales tax is that politicians “forget” to eliminate the income tax, we wind up with both, and become France.
My new piece at Daily Caller looks at how the Democratic Party's approach to tax policy has changed over the decades.
The piece was prompted by a recent article from Norm Ornstein and Tom Mann claiming that needed bipartisan reforms are being blocked by the new "ideologically extreme" Republican Party.
Baloney. It's the Democrats who have changed. The party's leaders have moved far to the left on economic issues.
As evidence, I point to this Cato Journal article from 1985 by Democrat Richard Gephardt, who was a leader on tax reform. As a free-market guy, I agree with the great majority of what Gephardt said, yet I agree with virtually nothing that modern Democratic leaders say about tax policy.
Regarding ridding the tax code of special breaks, Gephardt says, "I confess that I am not qualified to act as a central planner and I do not know anybody on either committee who is." Amen!
And Gephardt says, "We in Congress take pride in the free market system." When was the last time you heard a Democratic leader say something like that?
As we close in on congressional votes to increase the federal debt limit, negotiators are coming up with all kinds of ideas to hike taxes. (Suspiciously, they haven't revealed very many spending cut ideas so far).
One idea being discussed is to raise revenue by reducing the indexing of parameters in the income tax code. Currently, tax brackets and other features of the tax code are indexed to the Consumer Price Index (CPI). It is widely recognized that the CPI overestimates inflation for various reasons, as discussed here.
The Bureau of Labor Statistics has developed a more accurate (and lower) measure of inflation, called chained CPI. If the tax code was indexed to chained CPI instead of CPI, the government would receive an automatic tax increase relative to current law every year until the end of time.
Switching to chained CPI is a very bad idea for two reasons:
- It would create a large tax increase over the long run. And it would be an invisible annual tax increase on families and voters because there would be no obvious changes in their tax forms.
- It would be an anti-growth tax increase because it would push families into higher tax brackets more quickly over time, subjecting them to higher marginal tax rates. The chained CPI proposal is essentially a proposal to increase marginal tax rates slowly and steadily over time.
Some economists may argue that the chained CPI proposal is a good idea because the tax code would more accurately reflect inflation, and it would. However, the tax code already contains a bias that pushes families into higher tax brackets over time, which is called "real bracket creep." Real growth in the economy steadily moves taxpayers into higher rate brackets since the tax code is indexed for inflation but not real growth. The discussion in the Congressional Budget Office's new long-range budget outlook implies that this will be an important force in raising federal revenues as a share of GDP in coming decades.
So I've got a better idea than indexing the tax code to chained CPI: indexing the tax code to nominal GDP growth. That would adjust for the effects of both inflation and real economic growth on tax code parameters, and it would prevent stealth tax rate increases under our graduated income tax system.
- Please join us this Thursday, April 21 at 4:00 p.m. Eastern for a book forum and debate on "green energy" policy, following the recent release of the Cato book The False Promise of Green Energy. On Thursday, University of Alabama Professor of Law and Business Andrew P. Morriss (one of the book's authors) and Center for American Progress Vice President for Energy Policy Kate Gordon will debate the merits of the "green" economic agenda, moderated by Cato Institute Senior Fellow Jerry Taylor. Complimentary registration is required of all attendees by noon TOMORROW, Wednesday, April 20. We hope you can join us in person and for the reception following the event--if you cannot attend in person, we hope you'll tune in online or on Facebook.
- "Nothing in international law, however, can change the United States Constitution’s procedures for when the United States can go to war — which require the consent of Congress."
- Nothing says it's time to convert Medicaid to block grants like letters from 17 governors opposing the idea.
- Nothing would spur economic recovery like a "liberate to stimulate" regulatory agenda.
- Nothing says "failure" like 37,000 dead and climbing.
- Nothing is more complicated and convoluted than the U.S. tax code, which changed 579 times in the last year--more than one change every day:
- Republicans have a big opportunity to undo Obamacare and reform Medicaid and Medicare all at once.
- It's a good thing, too, because we're facing a big debt crisis and if we don't change course, federal spending will crest 42% of GDP by 2050.
- There's also a big elephant in the room in an excessively complicated tax code.
- One has to wonder if the Republicans intend to put the big sacred cow of defense spending on the table.
- Unrelated to the budget, education choice proponents scored a big victory in the U.S. Supreme Court yesterday in ACSTO v. Winn, a decision that upheld education tax credits:
In the final push before Election Day, President Obama has been traveling the country criticizing Republicans for favoring tax breaks for U.S. companies that supposedly ship U.S. jobs overseas. It’s a bogus charge that I dismantle in an op-ed in this morning’s New York Post:
The charge sounds logical: Under the US corporate tax code, US-based companies aren't taxed on profits that their affiliates abroad earn until those profits are returned here. Supposedly, this "tax break" gives firms an incentive to create jobs overseas rather than at home, so any candidate who doesn't want to impose higher taxes on those foreign operations is guilty of "shipping jobs overseas."
In fact, American companies have quite valid reasons beyond any tax advantage to establish overseas affiliates: That's how they reach foreign customers with US-branded goods and services.
Those affiliates allow US companies to sell services that can only be delivered where the customer lives (such as fast food and retail) or to customize their products, such as automobiles, to better reflect the taste of customers in foreign markets.
I go on to point out that close to 90 percent of what U.S.-owned affiliates produce abroad is sold abroad; that those foreign affiliates are now the primary way U.S. companies reach global consumers with U.S.-branded goods and services; and that the more jobs they create in their affiliates abroad, the more they create in their parent operations in the United States. If Congress raises taxes on those foreign operations, it will only force U.S. companies to cede market share to their German and Japanese (and French and Korean) competitors.
I unpack the issue at greater length in a Free Trade Bulletin published last year, and on pages 99-104 of my recent Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization.
Most people know about the individual mandate in the new health care bill, but the bill contained another mandate that could be far more costly.
A few wording changes to the tax code’s section 6041 regarding 1099 reporting were slipped into the 2000-page health legislation. The changes will force millions of businesses to issue hundreds of millions, perhaps billions, of additional IRS Form 1099s every year. It appears to be a costly, anti-business nightmare.
Under current law, businesses are required to issue 1099s in a limited set of situations, such as when paying outside consultants. The health care bill includes a vast expansion in this information reporting requirement in an attempt to raise revenue for an increasingly rapacious Congress.
In a recent summary, tax information firm RIA notes the types of transactions covered by the new 1099 rules:
The 2010 Health Care Act adds "amounts in consideration for property" (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(1)) and "gross proceeds" (Code Sec. 6041(a) as amended by 2010 Health Care Act §9006(b)(2)) to the pre-2010 Health Care Act categories of payments for which an information return to IRS will be required if the $600 aggregate payment threshold is met in a tax year for any one payee. Thus, Congress says that for payments made after 2011, the term "payments" includes gross proceeds paid in consideration for property or services.
Basically, businesses will have to issue 1099s whenever they do more than $600 of business with another entity in a year. For the $14 trillion U.S. economy, that’s a hell of a lot of 1099s. When a business buys a $1,000 used car, it will have to gather information on the seller and mail 1099s to the seller and the IRS. When a small shop owner pays her rent, she will have to send a 1099 to the landlord and IRS. Recipients of the vast flood of these forms will have to match them with existing accounting records. There will be huge numbers of errors and mismatches, which will probably generate many costly battles with the IRS.
Tax CPA Chris Hesse of LeMaster Daniels tells me:
Under the health legislation, the IRS could be receiving billions of more documents. Under current law, businesses send Forms 1099 for payments of rent, interest, dividends, and non-employee services when such payments are to entities other than corporations. Under the new law, businesses will be required to send a 1099 to other businesses for virtually all purchases. And for the first time, 1099s are to be sent to corporations. This is a huge new imposition on American business, costing the private economy much more than any additional tax that the IRS might collect as a result.
There appears to have been little discussion before this damaging mandate was slipped into the health bill and rammed through Congress, but a few business groups did raise concerns. Here’s what the Air Conditioner Contractors of America said:
The House bill would extend the Form 1099 filing requirement to ALL vendors (including corporate) to which they pay more than $600 annually for services or property. Consider all the payments a small business makes in the course of business, paying for things such as computers, software, office supplies, and fuel to services, including janitorial services, coffee services, and package delivery services.
In order to file all these 1099s, you’ll need to collect the necessary information from all your service providers. In order to comply with the law, you would have to get a Taxpayer Information Number or TIN from the business. If the vendor does not supply you with a TIN, you are obligated to withhold on your payments.
Private transactions are the core of a market economy, and the source of America’s growth and prosperity. Now the federal government is imposing a vast new web of red tape on perhaps billions of these growth-generating private exchanges.
For what purpose? So the spendthrift Congress can shake a few extra bucks out of private industry? The business sector is the generator of America’s high living standards, but most federal legislators just see it as a kitty to be raided or a cow to be milked dry.
I’m stunned that there wasn’t a broader debate before such a costly mandate was enacted. If it goes into effect, it will waste vast quantities of human effort in filling out forms, reworking computer systems, collecting and organizing data, and fighting the IRS. The struggling American economy can’t afford anymore suffocating tax regulations. This mandate is a giant deadweight loss. It should be repealed.