Get ready for your tax rates to go up.
Maybe not today, maybe not tomorrow, but sometime soon.
Not because politicians, or their constituents, are clamoring for higher tax bills; because Congress is effectively forcing itself to raise rates soon as a direct result of two distinctly foolhardy policies: aggressively defunding the nation’s main revenue collection agency, and continuing to complicate and Swiss-cheese-ify the tax code.
The spending bill passed over the weekend contains a lot of terrible provisions. But long-term, the most damaging may be its cuts to the Internal Revenue Service. The IRS is hardly a popular agency, even when it isn’t giving tea party groups a hard time about applying for tax-exempt status. But this cash-flow-positive agency is crucial to our nation’s fiscal health. For every dollar appropriated to the IRS in 2013, it collected $255, according to the National Taxpayer Advocate. Spending on tax collections — unlike almost any other kind of federal spending — is, unequivocally, arithmetically good for reducing deficits.
And yet, year after year, Congress continues to cut IRS funding. The agency’s appropriations in the 2015 agreement are 17 percent below their 2010 level, after adjusting for inflation. The number of IRS employees working on enforcement has dropped by 15 percent since 2010, according to the Center on Budget and Policy Priorities.
Amid all these cuts, the number of tax filers has grown and the agency’s responsibilities have expanded, thanks to the Foreign Account Tax Compliance Act and the Affordable Care Act.
Cuts to the IRS budget hurt compliance rates among taxpayers, both the dishonest and honest. Audits have slowed, and by many metrics, customer service quality has plummeted. Millions of calls come into the IRS each year from taxpayers who want to pay what they owe but who have questions about how to navigate the byzantine tax code. In 2013, about 40 percent never got through to a representative. The lucky ones who did had to wait an average of nearly 18 minutes, up from 2.6 minutes a decade earlier. Backlogs in taxpayer correspondence have likewise become enormous.
Over the long run, IRS budget cuts make tax evasion look not only easier but also more justifiable. Our tax system functions mostly through voluntary compliance. But as taxpayers get more disgusted by their interactions with the IRS — and by reports of rich companies not paying their fair share of taxes (more on that in a bit) — “tax morale” will wane and tax cheating will likely rise. Which will require higher statutory tax rates to make up for the shortfall.
Europe provides a cautionary tale in this regard. Italy and Greece have been stuck in vicious cycles in which tax evasion runs rampant, requiring politicians to raise tax rates to extract more money from the few law-abiding saps still out there, encouraging people to hide economic activity from even higher tax rates, and so on.
In addition to crippling the agency that can help pay our bills, Congress also seems pathologically committed to cluttering the tax code with more sweetheart carve-outs.
“Loopholes” and “tax breaks” are among the most frequently denounced bogeymen on Capitol Hill (second only, perhaps, to “waste, fraud and abuse”), and yet Congress continues to multiply them. Tax expenditures — spending through the tax code — totaled an estimated $1.4 trillion in the last fiscal year, and that figure is likely to grow.
Companies that lobby for these tax breaks know this perfectly well, leading them to invest in armies of accountants and tax attorneys who cleverly exploit the ever-multiplying loopholes. You know how I mentioned that IRS agents bring in way more money than gets spent on them? The same is increasingly true of big companies’ well-resourced tax departments, which have bizarrely become profit centers. Companies have staffed up on tax experts, and the IRS is staffing down. This combination cannot bode well for the public fisc.
If Congress really wanted to lower tax rates, it would broaden the tax base by simplifying the tax code, and it would adequately staff the agency tasked with collecting taxes. In both cases, it has done the opposite. All of this means that our political leaders have not only improved the odds for getting away with (illegal) tax evasion; they have also created more opportunities for (perfectly legal, methodically planned) tax avoidance. Put these factors together, and higher statutory tax rates look inevitable.