Last Wednesday, the IRS’s National Taxpayer Advocate (bet you didn’t know you had an “advocate” in the IRS!), Nina E. Olson, released her annual report to Congress on the efficiency and fairness issues that plague the U.S. tax code (HT: Joe Henchman). The report, which stresses the need for comprehensive tax reform, points out a number of issues that should be of bipartisan concern, issues that go beyond discussion of whether rates are too high or too low. Mostly, they highlight parts of the tax system that simply do not work as intended. One example:
In FY 2010, the IRS filed liens against 1.1 million taxpayers. When the IRS files a notice of federal tax lien, the taxpayer’s creditworthiness can be badly damaged for the long term. […]
The 1.1 million liens filed in FY 2010 compare with 168,000 in FY 1999, an increase of 550 percent. […]
A TAS study conducted in 2009 suggests there is a possibility that lien filings may reduce long-term tax collection. Notably, over the same period that lien filings have increased by 550 percent, annual revenue collected by the IRS’s Collection function on an inflation-adjusted basis has remained flat.
So even though tax liens, which can devastate a taxpayer’s creditworthiness, have shot up 500 percent, the increase may have had zero or even negative influence on collections. Oops! Stuff like this serves as a no-brainer, apolitical reminder of the need to simplify the tax code.
As for the contentious debate that awaits Congress over substantive tax and budget issues, Olson has some ideas on that as well:
… the National Taxpayer Advocate recommends that Congress make fundamental tax reform a high priority and approach reform in a manner similar to zero-based budgeting. To start out, the assumption should be that all tax expenditures would be eliminated unless a compelling business case can be made that the benefits of providing a tax incentive through the code outweigh the tax-complexity challenges that special rules create. [emphasis added]
This is, in fact, almost exactly the policy that was proposed by the White House’s fiscal reform commission – axing all tax expenditures to begin with and adding back in those that make economic sense. This is an excellent idea, if politically challenging. And how do we get around those polticial challenges?
… we suggest it may be more productive for Congress to consider these issues in two steps. First, Congress could enact systemic reforms to the tax code on a revenue-neutral basis. Second, Congress could decide on appropriate revenue levels and adjust the tax rates accordingly.
If Congress can eliminate enough tax expenditures, lower marginal rates and simplify the code sufficiently to make the changes revenue-neutral, this would still be an improvement from the status quo, even if we might want to see tax burdens ultimately fall further. Moreover, it could detach as much of the low-hanging fruit in the debate (simplification, broadening the base) from the contentious issues surrounding raising or lowering taxes.