Taxpayers across the United States were required to file their federal tax returns by April 18, and they did so amid a barrage of news about the Internal Revenue Service facing a significant backlog of tax returns, a staffing shortage and uncertainty about its funding.
That the U.S.’s tax authority is in bad shape is no secret. Nor are the reasons behind its troubles. The agency’s budget has been slashed by 18% over the past decade, and a yearslong hiring freeze means that as experienced auditors and other specialists retire, the pipeline of workers trained to take their places is running dry.
The agency is facing an excess of 7 million returns from last year that still haven’t been processed. And the Biden administration has estimated that some $600 billion in taxes owed by the wealthiest Americans go uncollected every year because the agency doesn’t have the manpower to audit returns for compliance with basic tax law.
Additionally, funding cuts have left the IRS playing catch-up when it comes to technology. Agency employees must manually enter information from paper returns, even though the technology exists that would allow the process to be automated.
Pandemic added responsibilities
The advent of the coronavirus pandemic in 2020 created a whole new set of challenges for the agency. In addition to having to navigate pandemic-related lockdowns, it was given the task of administering much of the relief effort, including stimulus checks, and later, the implementation of a refundable child tax credit that sent millions of Americans monthly payments.
“The incredible challenges with our system (are) how much we ask of it,” William Gentry, a professor of economics at Williams College, told VOA. “We don't just ask it to raise revenue. We ask it to serve all sorts of social functions.”
The agency finally saw a budget increase in the current fiscal year, to $12.6 billion from just under $12 billion the previous year. But because it has no certainty about its future budget prospects, IRS Commissioner Charles P. Rettig has warned lawmakers that it is difficult for the agency to plan for the long term.
International comparisons
As troubled as the IRS may appear to U.S. citizens, it is far more effective and efficient than tax authorities in many countries around the world, experts say. This is especially the case in developing nations, where the administrative capacity to operate something as complicated as a nationwide income tax assessment is limited.
Daniel Bunn, executive vice president of the Tax Foundation, a think tank in Washington, told VOA that in many developing countries, it is practically impossible for the government to track economic activity in a way that makes taxing personal income effective.
“There's a decent amount of activity that goes on in the cash economy, or the gray economy, or the black market — whatever term you use,” he said.
Because governments can only tax what they can measure, many developing countries rely on taxation of established businesses for a much higher share of their overall revenue than countries like the U.S. Bunn said that while developed countries rely on business taxes for only about 9% of their total tax revenue, developing nations average about 16%.
Consumption taxes
A unique feature of the federal tax system in the U.S. is its lack of a consumption tax component. Most other countries — developed and developing alike — use a value-added tax system, which adds incremental tax payments on goods and services at each stage of their production.
“For historical reasons, we've left consumption taxes — the taxes you would pay at the cash register — to the states through retail sales taxes,” Gentry said.
Economists are often frustrated by the lack of a value-added tax (VAT) in the U.S., which is seen as being more efficient than taxes on personal income.
“They distort economic activity less because they don't affect investment,” Thornton Matheson, a senior fellow at the Tax Policy Institute, told VOA. “They don't tax business profits, so they don't affect investment. They can affect labor decisions, but generally speaking, a VAT is more efficient than labor taxes, like the personal income tax, payroll taxes and Social Security taxes.”
Administrative ‘nightmare’
As much as they believe a VAT would be a better way for the United States to raise some of its revenue, experts acknowledge that the political effort involved would be enormous.
In addition to finding a way to replace or reallocate the revenue that consumption taxes already deliver to the individual states, it would require rationalizing the disparate systems that have developed over the years. Some states have no sales tax, while others tax different things.
“It would require harmonizing all the states, and they don't want to harmonize,” said Gentry. “New Hampshire doesn't have a sales tax. Tennessee taxes food, but Massachusetts doesn't tax food. And so, there are all these complicated choices.”
He added, “And then you start selling goods online, and it starts getting to be a nightmare.”
