Who will tame the taxman?

WHEN Barack Obama fired the acting head of the Internal Revenue Service (IRS) earlier this month, he doubtless hoped to quell the hullabaloo about its seemingly partial treatment of applications for tax-exempt status from conservative groups. He failed. This week protests were held outside several IRS offices, and Congress continued to investigate. The bureaucrat at the heart of the row refused to answer questions to avoid self-incrimination. Republicans began to invoke the word “impeachment”, if only to say, with a show of moderation, that it was not quite justified on the evidence revealed so far.

It turns out that more people in the White House were aware of the IRS’s misdeeds earlier than the administration had previously admitted. Jay Carney, the White House spokesman, had originally made it sound as if the occupants of the building knew nothing more than that the inspector-general who oversees the IRS was about to produce a report on some internal abuses. Now Mr Carney admits that Mr Obama’s chief of staff, Denis McDonough, not only knew about the nature of the scandal, but had discussed with Treasury staff when the report on it would be released.

The IRS selected for extra scrutiny groups whose names included conservative buzzwords, such as “tea party”, “9/12” and “patriot”. Republicans accuse the taxmen of persecuting anti-tax groups. The IRS’s defenders insist that a few low-level functionaries simply made a clumsy attempt at an administrative short-cut. A Pew poll finds that 42% of Americans believe the IRS acted on orders from the administration. No one has uncovered evidence of that.

Evidence abounds, however, that the IRS was badly run. The inspector-general’s report found “confusion” in the unit that picked on conservative groups about the section of the tax code they were supposed to be enforcing, known as 501(c)(4). Even when this became obvious to senior managers, the problem took almost a year to fix. And while it festered, some applications for the tax status in question lingered unresolved for over two years, while the hapless applicants were bombarded with unreasonable and intrusive requests for information, on everything from the content of their Facebook pages to the books their members read.

By its own admission, the service the IRS provides to taxpayers has been getting worse. Last year, it failed to reply to correspondence within the time specified by its own rules almost half the time. Between 2004 and 2012 the proportion of calls on its toll-free line it managed to answer fell from 87% to 68%, and the average wait rose from 3 minutes to 17. This year it is doing even worse. On April 15th, the day tax returns are due, it only answered 57% of calls. That matters, since “voluntary compliance”, as opposed to chasing delinquent taxpayers, brings in more money at less cost. The IRS is also doing less chasing (although few will lament that): the odds of an individual receiving a full audit are now just 1 in 360.

Money is part of the problem: since 2010, the IRS’s budget has been cut by 8%, as has its staff. To help make the required savings, the IRS is shutting up shop on five days over the summer. By the end of the year it will also have cut its training budget by over 80%. As the Taxpayer Advocate, an ombudsman, points out, cutting the IRS’s budget to reduce the deficit is misguided, since the more the agency spends, the more money it brings in.

In spite of the shortage of manpower and cash, much of the IRS’s time is devoted to inconsequential tasks. In the case of the applications for 501(c)(4) status, it seems to have dwelt on the submissions of small, local outfits, while waving through those from much bigger national groups. A recent drive to root out fraud in claims for tax credits related to adopting children is barely worth the effort, complains the Taxpayer Advocate. The IRS audited 69% of claims for this credit, yet of the $668m taxpayers said they were entitled to in 2011, it disallowed only $11m, or 1.5%. Adoptive parents, it turns out, are not the sinister conspiracy against the public purse that everyone imagined.

Lawmakers write the loopholes

The main reason why Americans dislike dealing with the IRS is not, however, the bureaucrats’ fault. Congress keeps making the tax code more complex. It is now 4m words long, and has been changed over 4,000 times since 2001 (see table). Americans spend 6.1 billion hours a year complying with it—enough work to keep over 3m people employed full-time without producing anything. Nearly 90% of filers pay for help with their returns. The cost of all this is equivalent to 15% of the tax raised, the taxpayer advocate reckons. This too, is self-defeating, in that it discourages compliance.

Politicians from both parties have long talked about simplifying the code by eliminating credits and deductions and using the proceeds to lower rates dramatically. Committees in the House of Representatives and the Senate have been working diligently on just such a plan. The Republican-controlled House would like to reduce corporate and personal income-tax rates to 25%. Democrats would rather use some of the revenue raised to pay down the deficit.

Some congressmen speak of a “grand bargain”, in which Republicans concede revenue increases in exchange for cuts to government health care and pensions, but there is little sign that the leaders of either party are prodding lawmakers towards such a deal. Politicians usually balk at taking on the myriad vested interests which all ferociously defend their favourite tax breaks, says Bill Gale of the Brookings Institution, a think-tank. For that reason, he argues, “tax reform is always the bridesmaid and never the bride”.