Eternal Revenue Service?

Could we really just “get rid” of the IRS?

Republican presidential nominee Bob Dole decries the excesses of an Internal Revenue Service that is “twice as big as the CIA and five times as big as the FBI.”

Reform Party candidate Ross Perot promises to abolish the IRS “as we know it.”

House Ways and Means Committee Chairman Bill Archer (R-Texas) says he’s determined to “get the IRS completely and totally out of every individual’s life.” And House Majority Leader Dick Armey (R-Texas) wants to “bring the IRS down to just a veritable shadow of its existing self.”

If elected, Dole promises, he’d cut the agency’s budget by 10%, ban the use of “abusive” auditing methods, grant a one-year tax amnesty for those who haven’t paid back taxes and eliminate the need for 40 million taxpayers to file a return.

“We’re going to downsize the IRS and up-size the amount of money Americans get to keep,” Dole promises in campaign speeches.

But are there alternatives to the IRS? Probably not, most experts say, because no one has figured out how to make sure the government gets the money it needs unless somebody collects it. And the will to change to other systems hasn’t materialized. Many people say the government should spend less, of course, but when push comes to shove, most Americans seem to want most of the things the government provides.

Examination of several alternatives to the income tax show why getting rid of the tax man wouldn’t be easy:

* Federal sales tax. If the government scrapped the income tax for a full-fledged sales tax, in theory there would be no need for individual tax returns. The burden of compliance would shift entirely to retailers, who would have to verify that they had paid Uncle Sam the required percentage of their sales.

But most economists think the rate for a federal sales tax would have to be at least 20% and perhaps more than 30% to bring in enough revenue to fund the government at current levels. And piling a federal sales tax on top of those most states levy could push the combined rate over 40%.

Sales tax compliance problems are “difficult and contentious when the rate is 5%; they would be gravely serious at 25%,” University of Michigan economist Joel Slemrod writes.

There is also a social justice question. The burden of a pure sales tax replacing an income tax would fall more heavily on low- and middle-income families--who have less discretion than the wealthy about whether to spend or save. Efforts to remedy that through grants or exemptions for the less affluent would require complex regulations and enforcement. The government could grant tax breaks for basics such as food, clothing or gasoline, but that approach would also add complexity.

* Value-added tax. Under a VAT, revenue is collected at each stage of production rather than only at the retail counter. Although it has some of the problems of a simple sales tax, it is more evenly spread through the economy.

Firms are taxed on the difference between their sales receipts and what they paid for the machines and non-labor materials they used to make their products. A VAT would allow firms to complete their tax returns using information they collect routinely, and many experts say it would have fewer compliance problems than a sales tax.

Experience in Europe, where a VAT is widely used, suggests it is no panacea. Exemptions and multiple rates that demand elaborate enforcement have crept into European tax codes, almost all of which rely on some combination of a VAT and an income tax to bring in revenue.

Slemrod says the failure of European VATs to achieve major simplification “suggests one should not compare the messy real-world income tax with an ideal VAT that, at least so far, exists only in the imagination.”

* Flat tax. Under a flat-rate income tax such as the one advocated by Armey, individuals with incomes above a certain threshold, along with companies, would file simple returns annually. Taxpayers could add income from wages, pensions and fringe benefits, subtract a standard deduction and divide by a fixed rate. Investment income--from interest, dividends, rent or royalties--would be excluded from personal taxes. Businesses would calculate their liabilities much as they would under a VAT, except they would deduct labor costs.

The IRS couldn’t be abolished, but its workload--particularly in monitoring of compliance by individuals--would be much lighter.

* Improve the existing system. Defenders of the income tax argue that it could be simplified dramatically with a few simple changes. Doubling the standard deduction--now $6,550 for married couples and $3,900 for singles--would radically reduce the need for record keeping by most filers. Closing loopholes would also permit a reduction in rates. The Clinton administration favors modest simplification, such as fewer reporting requirements on estate and property taxes for small businesses and increases in the value of travel and entertainment expenditures for which taxpayers must keep receipts.

“There’s no such thing as a self-enforcing tax system,” says conservative economist David Bradford of Princeton University. “You’ve got to have a tax collector.”

So what’s driving this assault on the IRS? Clearly, the agency isn’t popular. Republican strategist Frank Luntz, who monitored reactions of 36 swing voters to speeches at the Republican and Democratic conventions, found that criticisms of the IRS by Dole and vice presidential nominee Jack Kemp “were the single biggest applause-getters” of any speech.

The sheer hassle level for taxpayers is one factor. Ways and Means Chairman Archer estimates that the total cost to individuals and businesses of complying with the tax code exceeds $300 billion a year. The Tax Foundation, a conservative Washington think tank, puts the figure at $200 billion.

But Slemrod says those estimates exaggerate the value of taxpayers’ time. He calculates that cost at about $75 billion, or 6% of the $1.3 trillion in revenue collected from all sources by the IRS last year.

Recent developments have also contributed to a perception that the IRS just can’t get it right:

* The agency drew criticism last year because it delayed more than 7 million refunds for as long as two months to check discrepancies in Social Security numbers in government records and those reported by individual taxpayers. IRS spokesman Frank Keith said the review was part of a “well-executed effort” to curtail an estimated $5 billion in refund fraud perpetrated by taxpayers claiming fictitious or duplicate dependents.

* In September, the agency scrapped its Cyberfile system, a $17-million project designed to let taxpayers use personal computers to file their returns directly with the IRS.

* The Government Accounting Office also found that the IRS could not reconcile totals for revenue and refunds on its ledgers and could not account for a large chunk of its $3 billion in non-payroll operating expenses.

“The IRS is the perfect symbol for everything voters think is wrong with Washington,” Luntz said. “It’s intrusive, complicated, penalizing, and people think it’s completely out of control.”

Clinton aides denounce GOP criticisms of the IRS as partisan cheap shots--fired, they say, in desperation. IRS Commissioner Margaret Milner Richardson sees popular resentment of the tax collector as a constant of human society that reaches back to “prehistoric” times.

In May, Richardson chided GOP Rep. Jennifer Dunn (R-Wash.) after hearing that the two-term member of the tax-writing Ways and Means Committee had promised to “make life as hard on the IRS as they’ve made it on you.” In a letter, Richardson said she was “more than a little dismayed” by Dunn’s comments and worried about a potential drop in tax compliance.

Even IRS detractors concede that it’s unfair to blame the tax collector for the myriad complexities written into the tax code by politicians.

Nonetheless, 18 million of the 117 million individual taxpayers who filed in 1995 were able to complete their returns using one-page Form 1040EZ, according to the IRS. Average total time reported for keeping records and completing the form: one hour, 28 minutes.