One of the most conspicuous parts of the tax-and-spending package known as the Inflation Reduction Act is vastly expanded funding for the Internal Revenue Service.
The promised flood of cash — an additional $80 billion over ten years, compared with baseline annual spending of around $15 billion — raises some questions, and one of the most important is getting less attention than it should. If the IRS lacks the means to do its job well, could that be because its job is far more demanding than it ought to be?
In a word, yes: The IRS struggles to administer the system because U.S. taxes are insanely complicated. In this respect, the purportedly bold innovation on funding for the agency is partly a tribute to the status quo.
The enormous increase in spending is combined with another new batch of complexities. Highlights include incentives for climate-related investments and assorted other good things, and a minimum corporate tax that requires eligible companies to calculate what they owe not one way but two, then pay the larger sum.
Changes like these serve legitimate purposes, but they are partly self-defeating. With one hand you incentivize decisions that serve the public interest; with the other, you cancel them out by closing "loopholes."
On top of which, every further complication is an opportunity for tax avoidance, an added compliance burden on taxpayers and the IRS alike, and a transfer of income from producers of socially valuable goods and services to accountants and lawyers eager for their share of the resulting deadweight loss.
Make It Simple
The U.S. tax code hasn't been comprehensively simplified since 1986. Over the subsequent years, Congress has indulged its unlimited appetite for making it unintelligible.
(Back in 2010, a panel chaired by Paul Volcker reported that taxpayers and businesses spend 7.6 billion hours and "significant out-of-pocket expenses" to do their taxes each year, a cost equivalent to at least $140 billion, which was 12 times the IRS budget or 10 cents per dollar of income tax paid.)
What a mess. And what a shame that the new IRS budget isn't part of a plan to fix it.
In a narrow sense, the extra spending does make sense. My colleague Tyler Cowen argues that the IRS is badly run and should be told to smarten up before it gets more money — a fair point, given the agency's failure to modernize its systems and make better use of its existing resources.
But the squeeze on its budget (a cut of about a fifth in real terms since 2010) and the relentless rise in its workload (lately aggravated by the pandemic) would test any undertaking, especially one that was stressed to begin with.
Although the bigger budget will raise more revenue than it costs, there is much debate over just how big this bonus — revenue available to pay for more public spending and/or lower tax rates — will be.
