IRS Is the Infection, Not Cure for a Rotten Tax System

By Bruce Willey, Published by RealClearMarkets

The U.S. tax system is suffering from deep and systemic rot and needs a ground-up rebuild. But with the IRS acting more as the infection than the cure, restoring effectiveness to America’s tax system will require a revolutionary legislative reform effort based on bedrock principles of fairness and efficiency.

You can see the rot on display in both the IRS commissioner’s glib TV news appearances, where he sounds more like a political party spokesman than the head of a politically neutral government bureau, and in recent boastful press releases from the Treasury Department about the 600% returns it promises to “earn” on the $80 billion “investment” in IRS agents and resources that the Biden Administration rammed through in its Inflation Reduction Act. 

But throwing money at the terminus of the complex and dysfunctional U.S. tax system and bragging that will cure all that’s wrong with revenue collection is the equivalent of exclaiming that applying a new Spiderman Band-Aid will cure a gangrenous leg. It’s insulting in its over-simplification and nothing about it will have a beneficial effect on the real problem.The remarkable thing is that the kind of ground-up reforms needed don’t necessarily fall into neat left-right classifications. There could in fact be room for common ground – that’s how broken the tax system is right now. 

If Americans want real fixes, though, we’ll need to start with the real problems. But they’ve got little to do with understaffing at the IRS. The problems are obvious, but for some reason, seldom addressed:

Problem: The current tax system is designed for social engineering and political favors rather than raising revenue.

Solution: Design the system for simplicity and efficiency of administration. 

The extent to which current tax law has departed from its original and obvious mission – raise revenue to fund the operation of the government – and migrated instead to an instrument of social manipulation and political back scratching is astonishing. 

Want to know why you’d start thinking you needed $80 billion more dollars to collect taxes you can’t collect today? Because the system is incredibly bad at doing its main job: Raising necessary revenue at minimum cost to administer and to society at large. The U.S. Tax Code, the actual laws, currently run almost 7,000 pages. The IRS interpretations of those 7,000 pages add almost ten times that amount – 75,000 pages. It’s mind boggling – and wholly unnecessary.

Problem: The wildly complex tax code changes significantly from year to year.

Solution: Reform the tax code and then make it very difficult to tinker with.

The cost to individual and corporate taxpayers of tax system instability is enormous. Planning is difficult because anticipating and understanding liabilities is beyond the realm of the average citizen. Lobbyists pound away at every new Congress for sweetheart deals in the tax code and ideologues seek to reward and punish their perceived allies and enemies.

Many parts of the federal government system are not subject to easy annual change. The Constitution, obviously and by design, is extremely difficult to change. Nothing good comes from an ever-shifting field of play. Congress should consider setting significantly higher hurdles for amending the tax code. The code should be a contractual agreement between the American people and their government and should require supermajorities to change. If not, the incentive is for every special interest group and industry association to take an annual – and sadly, often successful – run at lobbying for tax code goodies that screw everyone else.

Problem: The enforcement of the tax code by the IRS appears to be increasingly political. 

Solution: Simplify the Tax Code and then separate Tax Code interpretation from Tax Code enforcement.

Right now the IRS serves as both interpreters and enforcers of the tax code. The IRS gets to flat-out make tax policy as Congress shirks its workload, and then gets to demand that taxpayers provide it a nearly unlimited flow of personal information in its pursuit of additional tax revenues and penalties. Yes, there are judicial and real law enforcement interfaces with the IRS, but let’s face it: The IRS uses threats and intimidation to have its way with taxpayers, and punishingly expensive legal proceedings are the only taxpayer recourse.

After a massive Tax Code simplification, the interpretation function could be greatly reduced – but still should be placed under a new agency – called, say, the Tax Code Interpretation Bureau. As an administrative body, it could issue the kinds of clarifications needed to effectively manage revenue collection. But enforcement could and should be separated, likely remaining in the IRS, with the tax court system as final-say arbiters. 

Problem: The IRS’s technology stack is broken.

Solution: Tax Code simplification, enforcement focus, new tech architecture.

The IRS has proven to be singularly inept at technology modernization, with a 2021 Government Accountability Office study noting that the IRS was going to take another decade to modernize its 60 year old computer infrastructure. Nowhere – nowhere – in the rest of the U.S. would a massive organization be allowed to flounder in the same manner without major scorched earth mass firings and restructuring.

The Biden Administration’s Inflation Reduction Act bonanza to the IRS is supposedly earmarked in part for technology – but the IRS has zero credibility in tech integration. Its recent claim that AI would be used to ferret out tax cheats? It’s the IRS’s Baghdad Bob moment. 

A new, efficient, high-security IT infrastructure could be designed around a reformed Tax Code from the ground up, and bring huge efficiencies in system administration, customer experience, and security functions. Oh – and actually make the collection of taxes and the detection of tax evasion easier.

Is ground-up reform of this magnitude a pipe dream? The first step in driving toward reality is to create a picture of a new reality that Americans can latch onto and support. The current system is nightmarishly bad, but rarely is a true alternative offered. While bi-partisan commissions have examined budget deficits and other fiscal matters, the next president should consider appointing a blue ribbon panel to recommend major ground-up reforms that would be in nearly everyone’s collective interest.

Then perhaps the American people’s attitude at tax time will shift from dread and resentment to patriotism and even pride in being part of a world-class system that works well for all constituencies.