Before We Reform Tax Policy…

by eugene steuerle

gene steuerle, a former deputy assistant secretary of the Treasury, is a fellow at the Urban Institute. A version of this post appeared on TaxVox. Follow Gene on Twitter at @EugeneSteuerle.

Published March 22, 2017


Congress and President Trump are embarking on what is likely to be a major rewrite of the federal income tax code. Yet neither they nor anyone else really knows which of the hundreds of tax preferences embedded in the current law accomplish their stated purposes, and which don’t.

Federal agencies routinely collect and assess evidence of the success — or failure — of spending programs. But the Internal Revenue Service doesn’t play by the same rules. Although it manages a wide range of provisions of the tax code intended to encourage taxpayers to do everything from live in houses they own, to save for retirement and to hold securities for more than one year, the agency has made little effort to evaluate their efficacy.

These policies (economists call them tax expenditures) reduce federal revenues by more than $1 trillion per year, and thus comprise more than one-quarter of all federal subsidies. Yet the IRS apparently does less than any other federal agency to gather the evidence that policymakers need to maximize the programs’ bang for the buck.

Years ago, the White House’s Office of Management and Budget instructed executive-branch agencies to measure program performance. Many have more or less done so. But the IRS essentially said it didn’t have the necessary information and did not comply.

This is immensely frustrating to those of us who have watched the evolution of federal budgeting as outlays have ballooned. While policymakers hardly like to fly blind, efforts to create disciplined, evidence-based systems have met with limited success. Washington has imported methods with catchy business school monikers — think “planning, programming and budgeting” and “zero-based budgeting.” And Congress did pass the Government Performance and Results Act in 1993 and amended it in 2010, with program evaluation in mind. Most recently, Speaker of the House Paul Ryan and Senator Patty Murray threw bipartisan weight toward the goal through the creation of the Commission on Evidence-Based Policymaking.

Even in this penny-pinching environment, there are ways the IRS could develop and present economic evidence on the programs it runs.

The National Academies of Science helped, too, creating expert committees to investigate both how to improve the quality of economic evidence and how to encourage the use of economic evidence to inform policy. (I chaired one of those committees, which analyzed the role of economic evidence in making programs benefitting children and families more efficient.)

But progress to date has essentially been made without assistance from the IRS. My purpose here is not to assess blame; Congress has already given the IRS far more to do than it can possibly manage well, even as it has slashed the agency’s budget. And that is not likely to change anytime soon. But even in this penny-pinching environment, there are ways the IRS could develop and present economic evidence on the programs it runs.

I have some straightforward suggestions. For a start, Congress could direct the IRS to report on each program (tax expenditure) it oversees, describing how the tax subsidies are distributed both by household income and geographical location. It could report on noncompliance or on gaps in its ability to enforce the law in each program. (In 2010 the Taxpayer Advocate made a similar suggestion.) And it could be a bit more proactive, comparing the benefits and costs of important tax expenditures at least on a rotating basis.

Next, the IRS commissioner could follow the lead of other agencies, hiring a chief evaluation officer who would work closely with the Taxpayer Advocate to teach staff to make better use of the tools that generate such evidence. Demetra Nightingale, who was the chief evaluation officer for the Labor Department during the Obama administration, says these tools were most successfully employed when staffers believed the tools could help them do their jobs better – and were not simply the diktat of someone higher up in the chain of command.

The most successful of modern tax reforms, the Tax Reform Act of 1986, succeeded in eliminating some tax breaks and making others less attractive. But ironically, too, this reform added complexity to the law. If Congress is going to look seriously at the impact of the tax subsidies embedded in the current code, it needs better evidence about which achieve their goals and which can be effectively administered. To that end, Congress must overcome the temptation to squeeze the IRS, giving it the resources to properly evaluate the hundreds of billions of dollars in programs it manages.

main topic: Tax Policy
related topics: Fiscal Policy, Economy: U.S.