Last week saw a renewal of the annual mid-April frenzy of shallow reporting about the U.S. tax system. Pummeled with nothing but misinformation and political posturing, Americans were once again left with little more than the sick sense that something is wrong, and the fear that no one will fix it. In addition, they were again encouraged to believe a dangerous falsehood: the IRS is to blame.
The Internal Revenue Service is a law enforcement agency. Its employees do not write the laws that they enforce, and they cannot control how much money they are given to carry out their duties. Both of those things are true of other law enforcement agencies, but with one crucial difference: the IRS has no political allies. Whereas politicians of both parties eagerly seek the favor of police unions, commissioners, and so on, no politician wants to be seen as “on the IRS’s side.”
The result of this is that the IRS is a political orphan, unable to effectively petition Congress to clarify and simplify the tax laws, or to convince that same Congress to improve the IRS’s ability to respond to the many new responsibilities that Congress dumps on the agency every year.
To a depressingly large extent, this is a bipartisan failure. Two years ago, when the news broke of an inspector general’s report that documented mishandling of applications from would-be “social welfare organizations,” there were immediate claims that the IRS’s errors had been politically motivated. Even though there was no evidence to support such claims (and there still is none), the Obama Administration quickly (and very publicly) dumped the acting IRS Commissioner, to distance itself from the IRS.
Democrats in general, however, have generally at least been supportive of the IRS as an agency that must enforce the law—a law that, as former Supreme Court Justice Oliver Wendell Holmes famously stated, is “the price we pay for civilized society.” Unfortunately, Republicans—who otherwise pride themselves on being the “law and order” party—have moved in the other direction.
Indeed, the Republicans have become so opposed to the very idea of taxation that they have clearly decided to undermine the enforcement of the tax laws when they cannot change the laws themselves. That cynical political strategy has caused a once-honorable political party to undermine the public’s respect for the law of the land, and then to use that disrespect to sow the seeds for further erosion of public trust in years to come.
The Plight of the IRS: More Responsibilities, Fewer Resources, and Rising Public Anger
There are few people who are willing to stand up for the IRS, even though many commentators on the left (and some on the right) understand that even the most lean government will need a competent and adequately funded tax collection agency. (A few people might be tempted by Senator Ted Cruz’s call to eliminate the IRS, but even his strange view of an ideal government would need to hire people to collect taxes.)
Therefore, it was refreshing on the Sunday before April 15 to see the political comedian John Oliver devote that week’s installment of his “Last Week Tonight” HBO show to a thorough-going, positively heartfelt defense of the IRS. Even Oliver, however, could not contain the snark, building his show around an analogy in which he described the IRS as serving the same role in the economy as the anus serves in the human body. We might not like to think about it, or look at it, but things are much worse when it stops working well. Try to imagine the public’s response to that kind of “defense” for any other law enforcement agency!
Even so, Oliver made some very important points. He noted that the otherwise-gridlocked Congress manages to enact an average of more than one change to the tax law every day. Even the most senior tax-savvy members of Congress have been notably oblivious to the effect that these changes have on the IRS’s workload. Thousands of experienced IRS employees have left the agency, and Congress has all but eliminated the budget to train new employees.
Bryan Camp, a tax law professor at Texas Tech University, recently described the budget cuts that Congress has enacted as a “buy five years, get one free discount,” because the budget cuts for the 2011-15 period have added up to almost one year’s lost annual appropriation for the agency. Meanwhile, the level of hostility that we saw even prior to the Republicans’ mid-term victory in 2010 resulted in the agency using antiquated computers and software, which now cannot be replaced in a punish-the-IRS environment.
The result, unsurprisingly, is that the IRS is not doing its job as well as it should or could. Republicans in Congress in the 1990s added a provision to the law requiring that the IRS’s Office of the Taxpayer Advocate (OTA) provide frequent public reports about how the IRS is performing its many required tasks. The OTA, which (against all odds) continues to do its job very, very well, dutifully documents the many ways in which the IRS’s performance is declining.
For example, it turns out that the percentage of phone calls to call centers that the IRS’s personnel were able to answer has dropped by more than half over the last few years, leaving taxpayers seething. This year was especially difficult, because for the first time the IRS was responsible for verifying whether people were covered by adequate health insurance, collecting a penalty (which the Supreme Court in 2012 sensibly determined was a tax, for constitutional purposes) from those who do not.
Of course, it is that last aspect of the story that heightens the partisanship. Republicans would hate the Affordable Care Act even if it were fully administered by any other federal agency, but having the “personal mandate” run through the IRS raises anti-tax fervor among conservatives to new heights.
The political game over the past few decades, then, has been crafted into a perfectly self-reinforcing cycle: The Republicans bring their anti-spending, anti-taxing, and anti-government fervor with them to the negotiating table, demanding that the IRS be crippled further as it tries to enforce the law. The Democrats put up a weak defense. The IRS’s budget is cut. The public’s experience with the IRS consequently gets worse. The IRS’s own internal watchdog is required to publicize the IRS’s failings. And the process starts all over again.
The Underlying Story: Why Do So Americans Buy Into the Anti-Tax Rhetoric?
Once one is operating in such a vicious cycle, the continuing degradation of the debate takes on a life of its own. At any given moment, a politician might even honestly claim that he has no choice but to honor his constituents’ demands that the IRS be punished. I do not think that such a claim is ultimately defensible, but I could at least concede that the claim is colorable.
There is, however, a deeper set of attitudes that feeds the public’s anti-IRS fervor, because the IRS is the face of the tax system, which means that “IRS Equals Taxes” in the public’s mind. Even though Republicans should in principle be able to fight for reduced taxes while also respecting the IRS and giving it the resources it needs to serve the American people, Republicans have chosen instead to use the IRS as the whipping boy in a morality tale, where the larger goal is to reduce taxes no matter what.
But why is there an audience for this political snake oil? After all, even though people do not like paying taxes, the public by and large understands that one cannot get something for nothing. We complain about cable bills, about gas prices when they rise, about food costs, and so on. Yet there are rarely moments when the public asks politicians to affirmatively damage the companies and agencies to which people must pay even large sums of money. Moreover, other countries do not see nearly the same amount of anti-tax sentiment as we see in the United States—even though so many of those countries have much, much higher taxes than we do, as I explain below.
The surprising fact is that the high level of anger about taxes in the United States is inversely correlated with essentially all of the reasons that people sometimes offer for being against taxation: the U.S. collects about the same amount in taxes as it has in the past (that is, our tax rate has not risen since the 1940s), we are a low-tax country by international standards, and we do not actually use the tax system to engage in more than token redistribution from the rich to the poor.
The most meaningful way to measure tax revenues is as a percentage of the overall economy, or Gross Domestic Product (GDP). Federal tax revenues this year are projected to be 17.7 percent of GDP, according to data from the Office of Management and Budget (OMB). That number was 14.6 percent in both 2009 and 2010, during the worst economic crisis since the Great Depression. Over the post-World War II period, we have generally bounced up and down in the 16-18 percent range every year, with a slight surge in the late 1990s due to the dot-com bubble. (State and local taxes have also been stable over time.)
Ah, but the OMB also forecasts that federal taxes will rise somewhat above the 20 percent level in the next decade, does it not? Although those forecasts might turn out to be unreliable, we do need to ask whether a sustained increase in overall U.S. taxes would be problematic, a question that we can answer by comparing the U.S. to other countries.
But first, it is worth noting that we are trying here to understand why the U.S. tax system has become increasingly unpopular over the last half century or so. During that time period, “We’re paying more taxes” was simply not a fact-based explanation for the changes in public attitudes, while “We might end up paying more taxes in the 2020’s” was obviously not the political rallying cry.
What about those other countries? The Organization for Economic Cooperation and Development (OECD) includes the 34 most economically advanced countries in the world. Counting all taxes collected at all levels of government, the other 33 members of the OECD in 2013 took in 33.8 percent of their GDP’s in taxes. The U.S. collected 25.1 percent, higher only than Korea, Chile, and Mexico.
If low taxes were a sure path to economic prosperity, this list would look quite different. Canada collected 30.6 percent in 2013, even while it passed the United States as the country with the world’s wealthiest middle class. Moreover, 2013 was hardly an aberration. The U.S. has been famous for years for its low taxes as compared to other countries.
But maybe the Republicans are relying on some kind of deep-seated fear of a grabby government to motivate people’s sense that the United States is engaged in too much Robin Hood-ism. That explanation, too, fails to hold up to scrutiny. Indeed, taking into account taxes at all levels of government, the share of taxes paid at various income levels is roughly equal to the shares of income that people receive.
For example, according to estimates from the Institute on Taxation and Economic Policy, the top one percent of U.S. taxpayers in 2015 will earn 22.2 percent of all income, and they will pay 23.8 percent of all taxes. The next 4 percent of taxpayers will receive 14.4 percent of all income and pay 15.2 percent of taxes. This is hardly the picture of a Swedish-style redistributive state. It is true that the top one percent pay a large fraction of taxes, but that is because they earn such a large fraction of income.
Moreover, the U.S. has also been collecting less money from corporate taxes, much less than the rest of the OECD collects from corporate sources. Notwithstanding misleading claims about statutory U.S. corporate tax rates, this country is not pulling money from the corporate sector for the benefit of poor people.
Finally, the American public actually appears to want to increase the progressivity of the U.S. tax system. A recent Pew Research Center poll shows that a clear majority of people think that corporations and “some wealthy people” do not pay their fair share of taxes, while a clear minority says that the poor pay too little.
In other words, the underlying facts do not support the idea that Americans have a well-founded set of reasons to hate the U.S. tax system. What they have is one political party, the Republicans, that has been endlessly demonizing taxes and the IRS for decades on end, while the other major party dithers and fails to stand up for the rule of law or even simple logic. Meanwhile, income inequality rises, and the middle class falls further behind. But at least nearly everyone can feel good about hating the IRS!