Lane: Don’t Shoot the Tax Collector… errr… I Mean Messenger

The fiasco over Trump’s taxes reveals why we need a more rational and equitable taxation system.

by Thomas Lane | 1/10/23 11:03am

Like many others, I watched closely as Congress released former President Trump’s tax returns in December of 2022. Also like many others, I audibly groaned while reading that the IRS not only twice failed to do the legally required annual audits of the president and vice president’s taxes, but Trump also somehow found a way to pay no taxes in 2020 and a mere $750 in 2016 and 2017. Part of the social contract is that those who have a lot must also contribute a lot to ensure we have adequate resources available for the common good. Clearly, the IRS is struggling to enforce that contract. To make matters worse, House Republicans just announced that their first bill of the session will be to seek a further cut to IRS funding, endangering the agency even more. So much for their calls to support law enforcement, I suppose.

To be sure, I don’t like paying taxes either. I don’t know anyone who does. But we would live in chaos without the work our taxes fund. They enable the government to provide essential public goods like Social Security, Medicare, food stamps, pollution control, national parks and more. I am an unapologetic supporter of the services the federal government provides, and the people who work in it are often unsung heroes. We must fix the numerous faults we see in the government, but simply letting the institution rot is no fix. That’s why we need to repair the IRS.

Perhaps the most obvious issue to the vast majority of us is how annoying it is to do our taxes. Unlike in just about every other one of our peer countries, the U.S. has no way to file taxes that is both easy and free for most people.  Such an option would be a relatively easy service for the government to provide. It’s not rocket science to team up a few accountants with some programmers to turn the most common IRS forms into an intuitive, user-friendly website that would generate your finished documents. Instead, we have a vast tax preparation industry with lobbying tentacles reaching deep into government decision-making. It ensures that if Americans want to do their taxes as simply as possible, they have to either pay up or dig for cleverly hidden “free file” software. It should be noted that free file only exists because the IRS managed to squeeze it out of the industry as a concession in exchange for not seriously pursuing provision of its own free file service in 2001. But, if that doesn’t seem bad enough, wait until you hear about how that free file software can be illegally boobytrapped into tricking users into redirecting themselves to paid versions they didn’t actually need. These companies designed free file to minimize the number of people who actually benefit from it in order to protect their business. It’s a disaster.

Fortunately, President Biden’s recent Inflation Reduction Act contains $15 million in funding for the IRS to explore offering its own free file service. This effort doesn’t go nearly far enough, since it isn’t a directive for the IRS to just go ahead and build the required platform, but it’s important to give credit where it’s due. Hopefully, given the decline and fall of the so-called “Free File Alliance” with the recent exit of its two largest participants, Turbotax and H&R Block, there will be enough pressure to get Congress to fully resolve this needless exploitation of low-income families and expensive annoyance for the rest. Tax prep assistance won’t totally go away, since taxes will always be complicated for the wealthy. But ordinary folks shouldn’t spend so much time — and certainly no additional hard-earned money — on doing their taxes.

Speaking of wealthy taxpayers, the IRS needs to be better able to audit them. Note that this isn’t really about Trump — he’s just a symptom of the broader problem. Tax cheating costs the U.S. a whopping $1 trillion each year. That’s over a third of the 2021 federal deficit, which itself was higher than normal due to temporary and extraordinary pandemic relief spending. Think about it — we could eliminate a huge chunk of the deficit just by better enforcing the laws on the books. The Treasury estimates that for each dollar spent on IRS enforcement, we get six dollars back. Just think of what we could do if we closed the numerous loopholes in the current tax code too. Most of the problems come from cryptocurrency, income from foreign sources and corporate abuse of pass-through provisions. The IRS’s enforcement division has shed about 17,000 staffers over the past decade, and a fully funded and staffed IRS would have no shortage of opportunities to bring its operations back up to speed.

Before anyone whimpers that a more effective tax system will hurt the economy, let me remind you that the Laffer curve — the infamous theory that in the right circumstances lowering taxes will actually increase revenue by spurring economic growth — has been agreed upon as hogwash among economists for a generation now. Yes, making sure everyone pays their share is effectively a tax increase on high earners, but there is no way that is going to ruin the economy. Rather, we should be looking at how higher tax revenue may boost the economy. Regardless of whether you believe that revenue should be used to decrease the deficit or fund more public goods, it is clear that money represents a way we can build a stronger, more resilient and more compassionate society. I personally welcome the opportunity to convert more consumption from yachts, private jets and other total non-necessities into meeting the basic needs of ordinary folks. A more efficient tax system is required for the better future we deserve, and that can only come about if we make filing taxes as painless as possible, combat tax cheating and close silly loopholes.

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