Make April 15 Just Another Day

Last month’s horror stories of IRS abuses, heightened by the spectacle of IRS agents testifying with altered voices from behind screens in the fashion of confessed criminals, galvanized Congress into action.

The Senate confirmed Charles O. Rossotti, chairman of American Management Systems, to be the new commissioner of Internal Revenue, a sharp departure from the long-standing practice of a tax expert in the post. The House, by a vote of 426 to 4, passed legislation to restructure the governance and many operations of the IRS.

The new commissioner speaks of inculcating a “customer service culture,” and the Treasury Department announced hiring of a consulting firm to design “customer satisfaction surveys.” The architects of the IRS restructuring agree that the agency should become a user-friendly financial services institution.

I will become a werewolf before I change from a taxpayer into a “customer” of the IRS. Tears will always fill my eyes when someone says, “I’m from the IRS and I’m here to help you.” When politicians claim they are making the IRS user-friendly, I am reminded of Emerson’s comment about an acquaintance: “The louder he talked of his honor, the faster we counted our spoons.”

I don’t mean only to carp. This restructuring legislation does make some significant improvements in tax administration. For example, it offers important protections to innocent people whose spouse or former spouse has failed to pay taxes. It reduces some IRS penalties to a more reasonable level. It provides much needed flexibility in IRS personnel decisions. Congressional procedures for IRS oversight and IRS budgeting should be greatly improved. Taxpayers will enjoy some additional rights during audits and collection disputes. This legislation is no cure-all, but it will be an important improvement.

The most promising provision of the IRS restructuring legislation is one that has been completely overlooked: Section 422, in which Congress confesses that it is the true culprit. This provision requires a “tax complexity analysis” before Congress enacts any changes in the tax law. We could have used one of those last summer. This is, after all, the same Congress that just enacted one of the most complex, least economically sound tax laws of all time.

The 1997 act, with its complex tax breaks for children and education, its multiple capital gains tax rates and its failure to cut tax rates or reduce major tax loopholes, completes the unraveling of the 1986 tax reform, which had promised but failed to deliver a broad-based, low-rate, fairer and simpler income tax. The IRS doesn’t work because its task is to administer an unadministrable tax law. If Congress is serious about getting the IRS out of the lives of the American people, it must place tax simplification at the top of its agenda.

Congress got lucky when the politics ripened for restructuring the IRS. A bipartisan commission had worked for more than a year to produce the blueprint for the legislation that the House passed.

In sharp contrast, we couldn’t be further from a bipartisan consensus on how to restructure the tax law. It is unmistakable that the American people are angry about the income tax, angry at how it is administered and cynical about the political process that has produced such a monstrosity. In last year’s presidential campaign, Steve Forbes called for a flat tax. This month House Republicans Dick Armey and Billy Tauzin embarked on a “Scrap the Code” road show to debate whether the income tax should be replaced by a flat tax or a national sales tax. The naysayers now are predicting that proposals to rewrite the tax law will do for the Republicans what President Clinton’s health plan did for the Democrats.

To be sure, if the American people are presented a choice among a national sales tax, a flat tax or the status quo, they may well respond “none of the above.” Additional options are available. For example, enacting a 10% to 15% value-added tax, as exists throughout Europe and elsewhere, would finance an income tax exemption of $75,000 to $100,000 and eliminate 100 million of the 115 million tax returns filed each year. The income tax that survived could be cut to a 20% to 25% top rate and would return to its pre-World War II status as a relatively minor feature of the tax system. The vast majority of Americans would have no contact at all with the IRS.

Railing against the tax code and bashing the IRS offer opportunities to score partisan points. But achieving tax reform requires building political bridges, not blasting partisan chasms. Perhaps, when the shouting from snake oil salesmen subsides, our leaders will find a way to forge a bipartisan solution. Although a much smaller step, the IRS restructuring legislation gives us some cause for optimism.