In Which I Kind of Defend the IRS

Talking Points Memo is reporting (with a very clear chart) on the scale of the "tax gap". This gap, which unlike a "missile gap" or "shoe gap" other blind calls to blind action, seems to be real, and is defined as the delta between taxes owed and taxes paid in a fiscal year. As TPM's chart, based on numbers from the nonpartisan Center on Budget and Policy Priorities, shows, the 2006 tax gap was $385 billion-with-a-b. This is second only to the $521 billion of military expenditures, larger than the $330 billion of Medicare spending, and a good sight more than the as-of-2006 $248 billion deficit. Neither TPM nor the CBPP go into detailed breakdowns of the gap's composition, but the CBPP was able to pick out the plurality culprit: underreporting of income. "Sole proprietors, a major class of small businesses, report less than half of their income to the IRS. In fact, under-reported business income is the single largest source of the tax gap, amounting to fully $122 billion in 2006 alone."

(This is not to pick on small businesses, the mythical all-American engine of the U.S. economy -- for dissent on that common assumption, see this NPR report. And this is not to let off the hook the "1-percenters" who move what would normally be "income" to "investment" by taking pay in stock options or other means, or place their money off-shore, or use any number of complicated dodges to end up paying low, if non-zero, tax bills. It's just that there are relatively many small business versus relatively few "fat cats", so in this case quantity of tax dodging overwhelms quality.)

It seems like a no-brainer, especially for those who spent this last summer forcing a Constitutional crisis over their avowed concern over the Federal deficit. (Or debt. They aren't always good at keeping the two straight.) These are bills that are due, bills defined and determined by tax laws agreed upon by Congress and state legislatures -- the very people who threatened a shutdown of the government over deficit issues, the very people who want to gut social programs, or kill Federal contributions to Planned Parenthood, or zero out foreign aid, as though the aggregate of those would be even a tenth of $385 billion. (Hint: they aren't. Not even close.)

A key finding in the CBPP report is this: "In the areas of the tax code with substantial information reporting and withholding requirements — most notably workers’ wages, which employers report to the IRS and on which they withhold income and payroll taxes — compliance is extremely high."

Let's go over that again. Where there are strong regulations on reporting, with enforcement, there's no problem. People report and pay their fair share, and are in the game the way it was designed, allowing other people to play fairly also. In contrast, the CBPP reports, "where there is no third-party information reporting or withholding, tax collections are abysmal."

Of course, knowing tax law, and what to report for income, can be a difficult task. No doubt reform could help some of those honestly baffled people. (Personal note: I long ago realized that paying someone to do my taxes saved me more than the equivalent in my hourly wage times the hours it'd take to understand what the hell some of these forms mean). There is generations-upon-generations of tax code, which has endured alteration and appending and what-have-you. Programmers, think of the code of a legacy application that's been worked on by hundreds of people over a decade -- spaghetti code. But the evidence shows that where there is strong regulation, there is strong compliance.

Now, how did we get here?

Just looking at the CBPP report, one can see that filling those tax code holes with strong reporting regulations would help. To quote at length:

"The Bush Administration pushed successfully for new withholding requirements on government contractors on the heels of troubling Government Accountability Office investigations showing widespread tax abuse. Then, in the 2010 health reform law, the Obama Administration teamed up with congressional Democrats to tighten reporting requirements on certain business transactions. These were two modest but real steps forward.

The current Congress, however, repealed both measures. To make matters worse, in last year’s deficit-reduction legislation (the Budget Control Act), House Republicans blocked Senate Majority Leader Reid’s effort to ensure sufficient funding for IRS tax compliance activities, even though the Congressional Budget Office concluded that it would have generated net budget savings of $30 billion over a decade."

So the first problem is resistance to clarifying and placing strong tax code. Debate amongst yourselves where the blame falls.

A second reason is that over the last decade, various administrations and political/private forces have pressed to cut support for the IRS. This is similar to how gutting the budgets of environmental and financial regulation departments at the Federal level have left giant holes for bad behavior at minimal cost. Recently, for example, we've seen the SEC have to settle slam-dunk cases, such as against Goldman Sachs, for relatively paltry sums, with no future leverage such as legal precedent, criminal convictions, and so on -- simply because the government agency in question does not have the resources to pursue prosecution or even audit for compliance.

You can see a teacup version of this in the 2006 move by the Bush administration to fire nearly half the IRS lawyers who audited tax returns on "some of the wealthiest Americans, specifically those who are subject to gift and estate taxes when they transfer parts of their fortunes to their children and others." That administration pushed hard to alter legislation to kill the estate ("death") tax, couldn't pull it off, so went after those who enforced it, or even just checked for it. Can't figure out how to rob a bank? Maybe if you could get the security staff laid off, it'd be easier.

This is still going on. Just recently the IRS reported that it's increasingly unable to do its job due to budget cuts and staffing. From the article: "Mr. Obama last year asked for the I.R.S. budget of $12.1 billion to be increased by more than $1 billion, to enable it to hire 5,100 employees. But Republicans, who oppose the health care program, succeeded in trimming the agency’s funds to $11.8 billion in the budget approved last month."

Of course, nobody likes audits, the idea of them or the practice. It is a painful process. But three things.

First: This is how we do. Though we may disagree with how the tax revenue is spent -- and that's healthy, on both sides of the political spectrum -- it is the cost of living in a civilization. And it's important to realize that tax cheating disproportionally benefits the top of the wealth scale, while taking away from those near or on the bottom. Though this could be seen as all the more incentive for the $50k/year small businessman, or waitron, to shave a little off the income reporting, my point is that we would all be better off with more consistent enforcement.

Second: These cuts don't just mean fewer audits. The affected IRS staff are also your Help Desk. Part of the reason audits are such a painful process is because we, as individual tax filers, might not have been sure of something, and had to make a good-faith effort. And we might have been wrong to some degree. But the cuts to the IRS staff don't just mean fewer evil auditors, but fewer people to answer our questions on April 14. This cuts our ability to figure out what the hell is going on in Line 48a: "Those demands have strained the I.R.S.’s ability to respond to inquiries from the public. Nearly half the taxpayers who wrote or faxed questions waited more than six weeks for a response, the report found. Taxpayers who telephoned for information found backlogs, too, the report said, as three in 10 calls went unanswered."

Third: You know, it doesn't cost that much, as a proportion of the Federal budget, to hire back these staffers. Certainly only a few million, tops. Even if they could reduce five percent of the tax gap, that'd be over $19 billion, based on 2006 numbers. That's a pretty good cost-benefit ratio, yes?

Fully funding Head Start is less than $8 billion a year. Worth it?

The Failure of Analogy in Policy: Debt Edition

Though I'm late to the party on noting Paul Krugman's unpacking of the actual U.S. national debt issue and his smacking down of hysteria over it, I do want to add that this is yet another failure point for analogy and metaphor in policy and politics. Krugman notes that the analogy most often used in discussion of national debt is that the country is like a family, the national economy is like a family's budget -- more specifically, the U.S. debt is often explained as a too-large mortgage that this family has taken out, and now must be repaid. And in general, there are broad strokes and similarities, and indeed analogies can at times offer us ways to wrap our heads around unfamiliar concepts: a peloton of cyclists sometimes moves and reacts like a flock of birds or a school of fish, as the small signals of individual movements propagate and translate into smooth movements of the whole. But, as Krugman shows, just because both involve borrowing money doesn't mean the implications of and appropriate actions for one translate to the other.

Basically, the problem is that analogies (and metaphors) aren't predictive: the peloton may act like a school of fish, but that doesn't mean some of the cyclists should be netted and would be tasty grilled with a bit of lemon. (No, really, the meat would be too tough.)

The same goes for so much of business journalism. One company may be like another, true, but that doesn't mean one is the other, and one's future will not be the other's. At this point, no one would honestly say that Facebook is MySpace and the same will happen to both (though both may end up on the ash heap of history) -- but they did.

The same goes for economics. As Krugman demonstrates:

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

Fact-based reporting FTW! It's not only lazy, but it's promoting Bad Ideas to allow the implications of an analogy to run unchecked. (Here we have to keep in mind something from user experience research, and tailor our design/writing to the impulses of users/readers; in this case, the natural impulse is to extend forward the path one has been put on.)

Granted, I've been guilty of employing a metaphor or analogy in a news story, sometimes even to amuse myself in the writing. I hope to keep in mind Krugman's takedown, and always ask, when employing such a rhetorical tool, "but what are the differences, and will they matter more?"

Political News You Can Actually Use

Now this is what I'm talking about. Andy "Don't Call Me Andrew" Sullivan at Reuters actually digs into a candidate's stated policy goals and proposed actions, and looks at what would happen to the U.S. should Paul get elected. It's strange to be so excited at seeing what really should be the job, and Sullivan does have to frame the story within the horse-race format that the other 99% of political news stories use in election years. And all the information Sullivan presents isn't really arcane; it didn't require ProPublica-style investigation, and many of us already knew various pieces of Paul's whacky notions. (Let's leave aside the question of whether voters will and/or should make their choices based on such policy positions or horse-race data, and the chicken-and-egg of whether that's an effect or cause of the 99% horse-race coverage.)

But let's applaud even this collect-and-overview piece. Where are the accompanying reviews of the stated policy plans for all the other candidates? I bet each and every one has at least one "can you believe this?" stated position.

Buffalo Bill's Defunct

The other day on NPR's Talk of the Nation, a caller had to admit that an on-air guest had stolen his thunder; the guest had just said that the current Presidential race is more like a reality show than a campaign. But even the guest wasn't being entirely original. Jezebel was on it and noted TPM noting it, showing even Republican candidates (current and former) placing themselves in this narrative of narrativity. But those were just the explicit castings, and not the real problem -- news relies on narrative, after all. The real problem is that even the "good" news outlets have long implicitly and explicitly favored narrative drive over any other content. That "reality show" is overwriting "horse race" doesn't make "horse race" any better for our future.

Though my love for NPR can perhaps verge into the stalker-y, it frustrates me to no end that the Political Junkie and other coverage is perpetually stuck on who's up and who's down in polls, perception, points. And it's not just NPR: the horse race is the standard template for talking about politics no matter you choose as your most trusted name in news. There have been the odd chart on who would benefit and who would suffer if 9-9-9 somehow became the law of the land, but that's the exception. (And this bit of policy analysis was, ironically, enabled by the same excessive and unworkable oversimplifications of the plan; who's been digging into what tax burdens for the poor would look like under a Romney or Huntsman plan? Actually, not radically different in shape, just in scale.)

Ed over at Gin and Tacos implies that the desire for narrative might even be shaping the race, rather than the race shaping the narrative. The networks are so hungry to be able to present the conflict of a nail-biter, Ed says, might be what ballooned one poll results into a perception that Gingrich could actually be a viable candidate. Well, there has to be some other reason, right? It's not like Gingrich is a viable candidate.

Even the excellent Pew Research Center's Project for Excellence in Journalism ends up with this as the foundation for their analyses. If you look at their recent study of how news media and blogs have treated the candidates, you can tease out that the rise or fall in how a candidate is covered is fueled by talk about their standings in the polls. The horse race is the CDO or CDS market driving the Dow and, like that bad situation, we're ignoring how solid or crappy the underlying mortgages (policies) are.

So the video introductions to the Republican debates on CNN, MSNBC, Fox, and others look like nothing so much as the opening titles for any random season of "The Apprentice". What were they before? Perhaps more like an into to a title fight, with who's favored and who's the underdog. Seriously, that's hurting America, either way. At least, as some Americans seems to seriously desire a motivational speaker as their President, we're just being more honest about making it entertaining.