Paul L. Caron

Saturday, March 14, 2020

NY Times: The Tax Code Is Overtaxed

New York Times, The Tax Code Is Overtaxed:

When a working-class divorced couple takes turns caring for the kids, who deserves a hefty income subsidy to help offset the cost?

Do the fees that college students pay to join a club or play a sport count as an education expense? What about the books they buy?

Should at-home genetic tests count as a health care expenditure worthy of a public subsidy? How about acupuncture, or massage?

These are the types of questions that, under the U.S.’s peculiar approach, fall not to elected officials, nor to the agencies in charge of family welfare, education and health care. Rather, they are the province of the Internal Revenue Service.

They are part of a long and growing list of ways that Congress has made the I.R.S. its tool to help people in certain situations and penalize them in others. Although the government does directly give some checks to people who are judged to need help, it distributes a huge swath of social assistance through provisions of the Internal Revenue Code.

The heaps of special deductions, exemptions and credits are part of what makes filing taxes an intimidating gantlet for many Americans — the reason that even an online tax service might ask you hundreds of questions to calculate your obligations.

The government subsidizes the working poor through the earned-income tax credit. It subsidizes health care by making health insurance benefits tax-free. It encourages retirement savings, college savings and child care spending through tax-free accounts.

And those are just the big ones. The United States also uses the tax code to provide more obscure benefits; some people receive (tax-free) compensation for wrongful imprisonment or because they are legally blind.

Many of these tax provisions are popular, achieve important goals, and in many cases have good reasons for operating through the tax code as opposed to more straightforward channels. But taken in the aggregate, they cause a whole lot of problems compared with an alternate world in which the government subsidizes certain behaviors more directly.

Funneling subsidies through the tax code gives the tax-savvy a disproportionate advantage. Many tax provisions structured as deductions offer the most generous benefits to the highest earners as a matter of arithmetic. A married couple making $75,000 is in the bracket with a 12 percent tax rate on their last dollar of income, meaning a given deduction is only about a third as valuable as for a couple making $425,000 that faces a 35 percent rate.

What this means is that in effect, the I.R.S.’s tax collectors spend remarkably little time collecting taxes. Rather, they administer social welfare programs, regulate retirement savings and, well, adjudicate discounts on those 23andMe kits.

“The problem with the creep of social benefits into the Internal Revenue Code is that no one ever said, ‘Oh my God, we’ve got a new mission, we aren’t just a revenue collector, we’re a benefits administrator, so we need to hire different people and set different goals,’” said Nina Olson. She was the chief taxpayer advocate within the I.R.S. for nearly two decades before becoming executive director at the Center for Taxpayer Rights last year. ...

[T]here is a cost to conflating the core job of collecting revenue for the government with being the all-purpose agency in charge of administering social and economic problems. Millions of American tax filers will face the complexity of the I.R.S. in the weeks ahead, grappling with dozens upon dozens of complicated questions when they just want to figure out what they owe.

Politics is at the root of this reality. Conservatives and centrist Democrats who might blanch at the idea of explicit government welfare — a federal agency cutting checks to families with low incomes, for example, or to help out with health expenses — are often more open to a tax subsidy that achieves the same thing.

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