the national interest

There’s an Extremely Stupid Reason Congress Doesn’t Want a Good IRS

Photo: Courtesy of the Vendor

Yesterday, Treasury secretary Janet Yellen noted that, in this decade, uncollected federal taxes will amount to roughly $7 trillion. Former IRS commissioners Fred Goldberg and Charles Rossotti have calculated that, with proper levels of funding, the agency could collect about 20 percent of the lost revenue — $1.4 trillion over a decade. Yellen’s Treasury Department proposes to collect 10 percent of the tax gap. Former Treasury secretary Larry Summers and economist Natasha Sarin have their own paper and split the difference, landing at around 15 percent.

Whatever the actual target may be, it is obviously extremely large. You would think such a vast pot of revenue would tempt lawmakers in either party. Senate rules require budget offsets to finance any new tax cut or spending program. Simply enforcing existing tax laws could finance generous new social programs or shiny new tax cuts. Instead of either, we are effectively spending the money on a subsidy for tax cheats, who are overwhelmingly affluent.

So why hasn’t this change happened already? The answer is that Congress’s budget rules don’t allow it. Republicans have attacked the IRS and starved it of resources, driving down the agency’s effectiveness, because that is what the rules incentivize them to do.

This perverse situation is the product of a series of inscrutable rules and traditions, layered atop each other, somewhat like an ancient city built upon ruins. Perhaps you have heard of “budget reconciliation.” That’s the Senate’s main work-around to the filibuster. Reconciliation rules allow Congress to pass major new laws with a majority, not the usual 60-vote threshold.

But reconciliation bills have to deal exclusively with tax and spending levels. More importantly, in order to be permanent, they cannot add to the deficit after a ten-year period. This puts an enormous premium on finding budget savings that can be used to finance new spending or tax cuts.

That incentive has led the CBO, the agency tasked with scoring all these bills, to set fairly strict rules to prevent Congress from gaming the system. Two of those rules — No. 3 and No. 14, if you want to look them up for some reason — prevent CBO from measuring the budget effects of increasing or decreasing enforcement. Suppose Congress decides to give the Centers for Medicare & Medicaid Services an extra $10 million to investigate and stop Medicare fraud. CBO can score the $10 million cost, but it can’t score any savings it might yield, by preventing doctors and hospitals from ripping off Medicare. The same applies to the Social Security Administration investigating disability fraud, or HHS, or other agencies.

But the largest impact this has falls on the Internal Revenue Service. According to CBO rules, funding enforcement can’t produce costs or savings. If Congress wants to give the IRS an extra $1 billion, that increases the deficit by $1 billion. If Congress cuts money from the IRS — hey, look, savings! Now you can spend that money on something more fun than government jobs for tax nerds.

“The guidelines are meant to help the CBO and the other scorekeepers apply consistent methods and reach accurate results,” Scott Levy explained for the Yale Law Journal, “but they actually force the CBO to reach inaccurate results when scoring enforcement and program integrity activities.”

Perhaps these rules made sense when they were first created in 1997 and CBO wanted to keep Congress from creating imaginary savings using trick accounting. But what happened almost immediately after this rule was a long war on the IRS.

In 1997 and 1998, Senate Republicans began staging splashy hearings to expose what they billed as systematically excessive enforcement by the IRS. The hearings were, by congressional standards, an explosive social phenomenon, displaying sympathetic citizens sharing painful stories about being hounded and threatened by an out-of-control agency. The most memorable moment came when John Colaprete told the Senate Finance Committee that IRS agents raided his restaurant and forced children to lie on the floor at gunpoint.

Media gave the hearings heavy, sympathetic coverage. President Clinton confessed the agency had been “unaccountable and often downright tone-deaf,” and submitted to restrictions on its enforcement to prevent any such abuses from occurring again.

It later turned out the testimony had been unverified, exaggerated, or outright false. The General Accounting Office found “no corroborating evidence that the criminal investigations described at the hearing were retaliatory against the specific taxpayer,” and “could not independently substantiate that IRS employees had vendettas against these taxpayers.” Colaprete, the star witness, eventually recanted his testimony and admitted he hadn’t been present during the raid. “Whenever there’s a very emotional state, it doesn’t necessarily lead to clear thinking on how you legislate,” an IRS official told Tax Notes 15 years later.

The restriction and funding cutbacks produced a steep drop in enforcement and tax collection. The agency later recovered, but then plunged again after another wave of anti-government Republicans launched a new war on the agency.

In 2013, Republicans made new accusations against the agency. The IRS had “targeted” tea-party groups for undue scrutiny, they claimed. The charges again drove high-profile hearings with sympathetic coverage in the mainstream media. “If in fact IRS personnel engaged in the kind of practices that have been reported on and were intentionally targeting conservative groups, then that’s outrageous. And there’s no place for it,” said an apologetic President Obama.

Obama’s goal at the time was to rebut accusations that he, or his allies, had personally directed the targeting of the tea party for political ends. The first wave of investigations proved he didn’t. Eventually, the agency’s internal report found there was no “targeting” of right-wing groups at all. The IRS turned out to have applied the same level of scrutiny to progressive groups. They were simply trying to enforce somewhat hazy rules governing the abuse of nonprofit status for partisan organizing.

And yet this campaign helped gut IRS funding over the decade. All the political incentives lined up in the same direction. Republicans loved beating up the agency that, in their mind, symbolized Big Government run amok. And as Congress scrounged for savings, cutting funding from the IRS was not just politically easy, but also — per CBO rules — a cost-free way to reduce the deficit.

Some administrations have tried to quietly rebuild some of the damage the agency has suffered. Biden is the first president to make dramatic, public promises to fund the agency and ramp up its revenue collection.

The trouble is that Biden can’t count on much revenue to pay for his new spending proposals, a handicap that discourages his incentive to fight for full funding. The administration thinks CBO rules will allow it to be credited for perhaps $500 billion in new collections through beefed-up reporting requirements, but not any additional revenue through tougher enforcement.

Changing those rules would require a majority vote in Congress. It’s certainly possible 50 senators will vote to alter CBO rules. But Senate institutionalists (the most well-known being Joe Manchin) are famously fussy about overriding its procedures, however cryptic, pointless, or outright harmful they may be. An administration source I spoke with is aware of the hurdle posed by CBO’s scoring, but believes changing the rules would be politically difficult.

In summary: The United States has bad tax administration because the Senate has a bad supermajority requirement that eventually created bad budget-scoring rules that a handful of powerful senators are unlikely to change because they hate changing rules. At some point, people in government are going to have to decide whether they care more about preserving its bizarre, misshapen systems, or making the government actually work.

The Extremely Stupid Reason Congress Doesn’t Want a Good IRS