You Can’t — and Shouldn’t — Abolish the IRS [A critique of Ted Cruz's proposal]

‘Completely unworkable,” “irresponsible,” “happy talk,” “a disservice to the political process.” That’s just a sampling of what tax experts, most of them right of center, told me they think of one of the most popular lines from Ted Cruz’s stump speech, his promise to abolish the Internal Revenue Service.

Senator Cruz has been talking about the idea for a couple of years now, but it got a bit more attention when he mentioned it in the speech he gave at Liberty University to officially launch his presidential campaign. You can expect the idea to get even more popular in light of a new report from the House Ways and Means Committee that the IRS intentionally diverted funds from customer service to other purposes, spends millions on union paperwork, and more.

The basic idea, according to Cruz’s speeches and a conversation I had with a Cruz adviser, is this: If you radically simplify the individual-income-tax code, you can reduce the size of the federal tax-collection bureaucracy so much that you could then get rid of the IRS and disperse its functions across other agencies.

This is a great applause line: Americans hate how complicated their taxes are, and they hate the IRS. It’s such a good line, in fact, that other probable presidential candidates, such as Senator Rand Paul and neurosurgeon Ben Carson, have adopted it too.

The problem: The idea probably isn’t feasible and has almost no merits as a public policy.

There is no doubt that an individual-income-tax code with many fewer deductions and credits — Cruz has suggested, for instance, keeping only the mortgage-interest deduction and an incentive for charitable giving — would be easier to enforce and therefore require fewer IRS agents. (A flat tax per se would not necessarily be easier to administer than a progressive one with many rates but few deductions and credits. Everyone can read tax tables.)

But tax experts say that, while the federal revenue agency could shrink under Cruz’s proposal, it could only get marginally smaller — not nearly small enough to say it’s been “abolished.” “You’d need slightly fewer revenue agents to conduct the same number of audits,” for instance, says Alan Viard, of the American Enterprise Institute. Donald Marron, a Bush-administration veteran and former head of the widely respected Tax Policy Center, says an idea like Cruz’s could make the IRS “smaller, sure. But vastly smaller? Probably not.”That’s partly because the IRS does a lot of things besides just process complicated individual tax returns. Much of its resources, for instance, go into enforcing the corporate tax code, which Cruz’s campaign says he doesn’t have plans for yet. Meanwhile, a lot of IRS agents — quite possibly not enough — are assigned to providing customer service to taxpayers. And while conservatives are rightly wary of the civil-liberties violations that tax enforcers can commit, labor-intensive audits are important. If a lot of income goes unreported or taxes go uncollected, trust in the system breaks down, rates have to be higher, and the economy ails.

Unless we have a different kind of radical tax reform, such as replacing the income tax with a state-administered sales tax (Cruz has flirted with an idea like this but isn’t pushing it now; it has its own problems), the federal government is still going to have a huge tax-collection bureaucracy.

In an interview, though, the Cruz adviser assures me that the senator means what he says: A Cruz administration will dismantle the IRS and distribute the remaining responsibilities across the rest of the federal government. “If [tax reform is] done correctly under a Cruz administration, there would be no need for the IRS,” the adviser says. “The remaining responsibilities for collecting tax revenue would be dispersed throughout existing agencies.”

So the federal government wouldn’t end up with many fewer tax collectors, but they’d be working for different agencies. Can we do that — ditch the IRS itself for a different set of tax collectors, either in a new agency or in existing federal offices? Yes, we can, but it’s not clear why it’s a good idea, except that it sounds great on the stump.

Most explicit on this point is someone who would know best: Mark Everson, who served as IRS commissioner under George W. Bush, and actually happens to be running for president too. The idea of distributing the IRS’s functions across the federal government, he says, “doesn’t reflect any real familiarity with how the tax code works, what the responsibilities of the IRS are, or frankly how to manage the government.” Breaking up the tax agency “makes no sense” and would make tax enforcement nearly impossible, he says, because of how poorly federal agencies work with one another. “It’s hard enough to coordinate within the IRS, let alone if you have different agencies involved,” he says.

In fact, while IRS discrimination under the Obama administration against conservative political nonprofits has only increased the contempt many Americans have for the agency, the IRS does a fairly good job of collecting taxes and has relatively few scandals in its history. (A number of them can be blamed on the White House or the FBI, not the agency itself.) “If you pin down, if you put a lie detector on people who have been critics of the IRS, like [Republican senator] Chuck Grassley, they would admit the IRS is one of the better-performing federal agencies,” says James Wetzler, a left-of-center tax lawyer who spent more than a decade at the Joint Committee on Taxation and served on a commission to reform the IRS in the 1990s. This is not the highest praise; the IRS regularly fails to meet transparency requirements, for instance. But it does manage to do the job it sets out to do at a relatively reasonable cost, Wetzler says, which is enough to outshine other federal bureaucracies.

Not everyone agrees with that positive assessment. Chris Edwards, director of tax studies at the Cato Institute, says the IRS is “a typical bad federal agency.” But there’s definitely some evidence of its efficiency: The United States’ “tax gap,” the difference between taxes owed and taxes collected, compares respectably with those of other countries, and the IRS is well regarded internationally. Congress chose to task the IRS with the implementation of Obamacare, Everson points out, because the other available agencies are considered less capable.

While reports like this week’s House Ways and Means investigation on IRS funding priorities are embarrassing, they’re not evidence that the agency is any more incompetent or corrupt than your average federal agency. Inane bonus structures, incompetent handling of budget cuts, millions of dollars and thousands of hours spent on union purposes via a practice called “official time” — these are standard, if still shameful, federal failures that won’t go away if you move IRS agents to a different office building.

When I spoke with the Cruz campaign, they didn’t even attempt to make a case for abolishing the agency. Cruz is “not going to get rid of one bureaucracy only to create another,” the adviser says (other, existing bureaucracies would have to get bigger, it goes unsaid). When pressed about why dispersing IRS functions across other parts of government would be an improvement, he offered no clear justification. “It will be vastly more efficient to put the people who are doing jobs that still need to be done into agencies that have existing infrastructure” for similar purposes, the adviser said, without offering any reason why that would be “vastly more efficient” than the current situation. I also asked whether the idea is that, in light of the nonprofit-targeting scandal, the agency is so corrupt that it has to be dismantled; I didn’t get an answer.

Many Americans surely do just want to end the IRS, period. They don’t need any convincing. But one would hope for a little more seriousness from a presidential campaign — an explanation of why doing this should be a key priority in the important task of tax reform.

Some moves toward a better, more pro-growth tax system could actually mean more federal employees, not fewer. Republican tax plans, for instance, generally propose moving to what’s called a territorial tax system, ending the taxation of income American citizens and companies earn abroad. That would require new IRS resources, AEI’s Viard says, to make sure that companies don’t exploit this change to evade taxation. Taxing employment benefits such as health insurance just as wages are taxed, usually a conservative priority, could also mean more IRS work, because the value of those benefits has to be assessed. Plenty of ways of making taxes easier to file, such as offering the option of pre-filled tax forms, would free up businesses’ and individuals’ time and money for productive purposes, but would probably require more IRS employees, too.

Tax experts agree that the main problem with America’s tax system is the Congress that wrote it, not the agency that administers it. That is where tax-reform efforts should be focused.

Cruz has months to flesh out his stump speech with a broader policy agenda. The implausibility and unseriousness of one of his favorite campaign promises, though, is not a heartening sign.

Your self-serving tax preparer needs to imagine how much fun it would be, and how lucrative it would be, to give accounting and financial advice to individuals and companies based on ROI absent the infernal tax code!

CPAs and the like will be richer, have better health and a better sex life after the FairTax becomes law of the land!

You are correct!

The so-called “Flat Tax” is still an income tax, and I can make the case that a flat income tax will cause the IRS to become even more intrusive and antagonistic towards the citizenry (that would be US!).

The problem is that everyone wants a simple solution. Politicians have had bumper sticker solutions (Abolish the IRS!) for decades, but they usually ignore the realities of everyday life. Even Ted's flat tax proposal retains the mortgage interest and charitable deductions.

If starting from scratch I would advocate a consumption tax but I don't see a path to get there from where we are now.

The reality is we need to deal with what we have in front of us and that is an income tax with a horribly bastardized (by congress) incentive system.

As satisfying as it feels we can't just trash the existing system but have to discuss realistic alternatives.

This attacks the wrong end of the beast.

We have a complex tax code because we collect a lot of taxes.

We collect a lot of money in taxes because we spend it on a too-large government.

Cut the size of government (a lot), and some of this problem will fix itself.

The ONLY realistic alternative is the FairTax!

Above all else, we must insist that there BE NO hybrid system! We MUST abolish the income tax completely, and do an orderly wind down of the IRS. Transition issues can be worked out.

If we are smart enough to go to the moon, and build a space station, we are smart enough to replace the income tax with the FairTax and abolish the IRS without causing the country to collapse!

Most of the complexity in the system is in determining what is income, not in figuring out what rate to pay on that income.

True, but both flat and progressive tax systems will have that same problem. There is nothing in that that makes one more complicated or less so than the other.

There is withholding on all employees both full and part-time. Then there are all the rules on who is an official “employee”. Add to this, determining just exactly what is “income” and there will be thousands of pages of rules on that.

Then add to this the mischief that politicians can do to all those regulations.

Withholding should be entirely optional. Also, that has no effect on income or tax rate, it's just a pay-as-you-earn taxing system. And there shouldn't be nearly as many regulations as there are now. Any kind of subsidy, deduction, credit, etc. is all ridiculous and has no place in our system.

Besides, once you actually manage to go to a state-level tax system, you won't have nearly as many issues with the FedGov trying to do any of that. Some states may have that issue, but many won't.

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