In one of the great D.C. key-dangles (“look over here, not over there!”), congressional conservatives have everyone looking the other way while they try to defund the Internal Revenue Service. No question, recent IRS screw-ups are feeding right into their opponents’ plans. But let’s not lose sight of what’s really going on here: This is just a different way to try to shrink government, accommodate tax evasion and even undermine the implementation of health reform.
Let’s start with the screw-ups. This all began with the revelation that the tax collection agency was allegedly targeting certain political groups, especially tea party types, based on their political ideology. I yield to no one in my contempt for such actions.
But what was really happening here looks to be less nefarious, though equally damning. This New York Times editorial incisively explains the issue. The agency was trying to determine whether certain “social welfare organizations” were engaged in more political activities than their request for tax-exempt status would allow. But tax law in this area is vague to the point of unenforceable. As the Times points out, “There are no clear standards for how much political activity [these groups] can undertake, or even a clear definition of what political activity is.”
Where the agency went very wrong was in its unbalanced searches, based mostly on names that tilted in one ideological direction. The fact that this was motivated by expediency as opposed to political targeting doesn’t excuse it (though why any group engaged in political activities should get tax-exempt status remains a mystery).
And, no question, for an information-gathering agency of this magnitude and importance to lose a bunch of e-mails is as preposterous as it is incompetent.
But here’s what’s going on behind the curtain of this political theater.
Everyone loves to hate the IRS, but everyone also likes to drive on roads, be covered by Medicare and Social Security, and to enjoy the plethora of public goods — schools, medical research, safety nets, national parks and so on — that characterize advanced economies. So we need to levy and collect taxes to pay for these goods.
To collect taxes, we need an amply funded IRS, and therein lies the real scandal. The details are in this new Center on Budget and Policy Priorities paper by Chuck Marr and Joel Friedman, who document “…significant cuts that have occurred in IRS funding, which remains well below its 2010 level…. The cuts have led the IRS to reduce its workforce, severely scale back employee training, and delay much-needed upgrades to information technology systems. These steps, in turn, have weakened the IRS’s ability to enforce the nation’s tax laws and serve taxpayers efficiently.”
By cutting the IRS budget, Congress ensures that the $385 billion annual tax gap — that’s the estimated difference between taxes owed and taxes paid — remains in place. According to Treasury Department estimates, each additional $1 spent on IRS enforcement yields $6 of additional revenue. In this regard, whacking the IRS budget works to preserve and potentially expand a big tax cut, albeit an illegal one. That gap represents 11 percent of this year’s spending, implying that the failure to collect revenue that’s owed adds significantly to the budget deficit, another reminder of how some of these alleged budget hawks are really chicken hawks.
Marr and Friedman identify these additional facts of the real case:
- The figures below show a 14 percent fall in the agency’s inflation-adjusted budget (figure 1) along with an 11 percent decline in its staffing levels (figure 2), 2010-2014. IRS staff assigned specifically to enforcement is down 15 percent.
- The president’s 2015 budget proposes a $1.2 billion increase in IRS funding. While that increase would certainly help, it would still leave the agency 7 percent down in real terms from its 2010 funding level.
- And House appropriators are predictably pushing in the other direction, proposing a 2015 budget that would leave the agency’s budget about 18 percent down from 2010 levels in real terms.
- As these cuts have transpired, the IRS has two big, relatively new jobs: 1) implementing the Affordable Care Act, which has large and critical tax components (e.g., the IRS must administer the millions of health insurance premium tax credits) and 2) implementing the Foreign Account Tax Compliance Act, which, according to Marr and Friedman, “seeks to reduce illegal tax evasion by requiring filers and financial institutions to report more information to the IRS about assets held in offshore accounts. More than 77,000 financial institutions in 70 countries have already registered under FATCA.”
The IRS, by failing to stop the ideologically tilted database searches and losing e-mails allegedly related to that case has unquestionably handed its attackers a huge ring of keys to dangle as they go about underfunding the agency and reducing its ability to do its job. But when someone the other day described these developments as “Orwellian,” I was compelled to correct him. They’re “Pynchonian,” as in this Thomas Pynchon quote I find myself recalling almost daily these days: “If they can get you asking the wrong questions, they don’t have to worry about answers.”