Tax day is approaching, and a shorthanded Internal Revenue Service just got a $675 million boost (6%) from Congress and the president. But money won’t fix this problem. We can solve it — and maybe some other problems — with tax reform.
The IRS has its issues. Law professor Beverly Moran reported that last year, “taxpayers had trouble reaching the IRS, tax returns took months to process, almost a quarter of refunds didn’t go out until 2022, and collection notices were sent out even after the tax owed was paid,” and added that the IRS failed to answer 250 million phone calls. The Washington Post suggested that, “What the IRS really needs is a big investment to staff up and modernize its systems. Congress must treat this with the same degree of urgency as the nation’s crumbling infrastructure.”
That’s one way to go. Another approach would be drastically reducing the complexity of federal taxes.
The IRS estimates that small firms bear almost two-thirds of all business compliance costs. In a sense, there are three different taxes: the tax itself, time and money to prepare the returns, and lost interest when paying prior to the due date. The Tax Policy Center says that although almost everyone agrees the current tax system is too complicated, it gets more complex every year. In 2021, the National Federation of Independent Business reported that 64% of small business owners found federal income taxes to be an administrative burden.
While addressing tax complexity, why not solve other systemic issues? First, there are our popular social programs. Social Security Trust Fund reserves are projected to be exhausted somewhere between 2034 and 2037. When that happens, retirees’ benefits will be cut, perhaps to 78%. Worse, a report that the Medicare trustees have put forth estimates that the Part A trust fund, which subsidizes hospital and other inpatient care, may run out as early as this year. Medicaid, which covers one-in-five people with lower incomes in this country, will run out of funds perhaps as early as 2026.
Then there’s our national debt. In January, it stood at $30 trillion, including $23.5 trillion owed to creditors. The annual interest that must be paid is over $300 billion each year — our fastest-growing federal expense. Interest on the debt is 23% of all discretionary spending (i.e., everything except Social Security, Medicare and Medicaid). And when interest rates go up, our interest payments go up. Other ways we’re impacted include higher prices, lower home prices, decreased spending for other government priorities (like climate change, education, veterans benefits or defense) and lower returns on private investments.
For both social programs and the debt, there are two solutions: reduce spending or increase taxes.
It’s politically unlikely that we’ll decrease spending on seniors and those of lesser means, even though they represent more than 65% of all spending. We have also just been through a pandemic on which we spent trillions, and it’s uncertain how much we will spend to help contain Russian aggression. While we should cut some spending on useless programs, it is not clear how much we can cut or where.
That brings us back to tax reform and the IRS. Tax increases are never popular, but one way to make them more agreeable is to simplify taxes across the board and reduce compliance costs. The Tax Foundation estimates that we give up 3.24 billion hours and $37 billion to comply with federal taxes each year. Given the headaches and anxiety that come with this, Americans don’t need more IRS workers. We need a leaner agency that lets us quickly pay our share.
There are many such proposals and, of course, they run into opposition from the usual cast of characters who have vested interests in keeping all of their deductions, the Alternative Minimum Tax, and so forth. But individual filers and small businesses represent a huge proportion of the public who would gain from simplification.
Taxes would have to be set at levels that fund our social programs — ideally with those made more sustainable — and, by law, pay the interest and a certain percentage of the debt each year. This would end a lot of worries for a lot of people and put the United States on a firm fiscal base.
There is no need to hire more people to oversee a reformed system. What’s not to like?
Richard Williams is a senior affiliated scholar with the Mercatus Center at George Mason University.