Just Taxes Blog by ITEP

GOP Dilemma: Love the Tax Cut, Hate the Agency that Administers It

February 14, 2018

It hasn’t been an easy month for the Internal Revenue Service. Just days after Congress passed a $1.5 trillion tax cut, the agency began implementing and enforcing a number of complicated new tax provisions that will dramatically rewire the way our tax system works.

This new workload came just as the service was ramping up for its busiest time of the year, the 2017 tax filing season, while dealing with government shutdowns that set back its basic enforcement efforts. Now the President’s proposed budget for 2019, released Monday throws the IRS a new curveball: the agency must achieve all these goals with less money than it was given last year.

The president’s budget proposal would cut the agency’s baseline funding from $12 billion to $11.1 billion this year. This is almost a quarter less, in inflation-adjusted terms, than the $14.4 billion the agency received in fiscal year 2010. Not surprisingly, the long, steady decline of IRS funding during this period has led to a reduction in staffing: the agency’s 2016 employee total of 77,000 was 17,000 lower than at the beginning of the decade.

This move comes at a time when the agency’s main task of administering the federal tax system is becoming more challenging. For the tax year that began in January, the IRS must quickly develop forms and regulations to comply with Congress’ latest Frankenstein creation, a special deduction for certain forms of pass-through income that has prompted waves of criticism from tax accountants and policy experts. On the international front, the IRS must develop regulatory strategies for implementing the tax bill’s new territorial corporate tax system, which includes several complicated tax provisions designed to prevent companies from shifting their profits offshore.

In each of these areas, the clock has already started ticking in more ways than one. As the IRS hastily develops rules to fill out the many important policy details left blank in an often impressionistic tax bill, unscrupulous individuals and businesses are already combing the new law for novel tax avoidance possibilities. Tax experts have already pointed out a wide array of obvious strategies for gaming these new tax rules, and over time well-heeled corporations and wealthy individuals will find more baroque strategies.

Cutting the IRS budget is foolish because additional IRS funding brings in additional revenue. One study found that every dollar in additional enforcement spending by the IRS brings in $10 in additional revenue and another study found that every additional dollar the IRS spends on its system modernization program has a payback of $200. The nation’s budget and deficit woes alone should incentivize lawmakers to make the IRS more efficient.

The president’s proposed budget is not entirely insensitive to these concerns. Beyond the $11.1 billion basic funding request, the administration is also requesting a 10-year stream of nearly $15 billion to strengthen the agency’s enforcement abilities. Among other things, this funding would give the IRS more time to examine tax returns before issuing refunds, acting on a recent finding by the General Accounting Office that individuals used false identities to steal $1.68 billion in tax refunds in 2016. But this year’s share of the new funding, at $320 million, would still leave the agency’s 2019 budget—and staffing—far below its levels at the beginning of this decade.

It makes no sense to ask the nation’s tax collectors to draft and administer rules for an entirely new set of domestic and internal tax rules, and to give them a pay cut for their troubles. Such a strategy can only seem rational if you’re affiliated with a political party that loves tax cuts as much as it hates the agency administering them. Since a series of late-1990s legislative hearings on IRS abuses that were better described as show trials, Republican leaders in Congress have persistently sought to undercut the agency’s funding and even blamed the IRS for the complexity of the tax code Congress had created. House Speaker Paul Ryan—one of the main architects of the new tax law—has long argued that the complexity of the tax code is  the IRS’ fault.

Congress and the Trump Administration can’t have it both ways: if policymakers insist on making the federal tax code more complicated by larding it up with new, vaguely defined business giveaways, they must give the IRS the administrative and enforcement tools it needs to dole out the goodies. And if lawmakers truly want a “leaner, meaner” IRS, as Speaker Ryan has long promised, that process will have to start with true tax reform.



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