Ideas. Action. Results.

Tax Administration: Compliance, Complexity, and Capacity

Monday, April 8, 2019

Debates over the appropriate level of taxation and the distribution of the tax burden are highly political in nature and often contentious. How the government administers the U.S. tax system typically draws far less attention from policymakers and the American public, but is critically important. It affects the government’s ability to raise the revenues needed to meet its obligations, the burden placed on taxpayers, and taxpayers’ confidence in the fairness and integrity of the system as a whole.

There is considerable agreement on the goals of tax administration, with broad consensus that the system should be easy to understand, easy to comply with, and efficient. And everyone wants a system that treats all taxpayers fairly and minimizes tax evasion. Unfortunately, most agree that the U.S. tax system falls seriously short of these goals. Two concerns, in particular, are common:

  1. The U.S. tax system is too costly to comply with and to implement. Tax filers have to spend too much time, energy, and
    money understanding and filing their taxes.
  2. At the same time, the system is too easy to game or evade, resulting in the loss of hundreds of billions of dollars in tax
    revenue on an annual basis. Ultimately, others bear the burden of this shortfall, either through higher taxes on those who
    do pay their taxes or through reductions in government spending.

Both of these critiques stem from the U.S. tax code’s enormous complexity. The cost and time associated with filing returns constitutes a growing burden on taxpayers and on the economy, separate from and independent of the magnitude of the tax payments themselves.

The U.S. tax system is too costly to comply with and to implement… At the same time, the system is too easy to game or evade

Exacerbating both concerns, and taxpayers’ understandable frustrations, Internal Revenue Service (IRS) resources and capabilities have not kept pace with the code’s growing complexity—in large part due to underfunding by Congress. This has inevitable consequences for the agency’s ability to provide timely support and assistance to filers, to effectively administer programs such as the Earned Income Tax Credit, and to deter tax evasion through audits and compliance actions.

This report focuses on the administration of the U.S. tax code and on the challenges of making the system more efficient, user-friendly, effective, and equitable than it currently is. We begin by discussing the overarching issue of complexity and its implications for the compliance burden tax filers face, while also identifying a few concrete steps that could simplify the tax code in the near term. Subsequent sections focus on other discrete aspects of the administrative challenge: closing the tax gap (that is, the amount of true tax liability that Americans do not voluntarily pay on time); addressing specific concerns about the administration of key anti-poverty provisions in the tax code (notably, the Earned Income Tax Credit and the Child Tax Credit); and improving IRS taxpayer service and capacity. The final section examines the advantages and disadvantages of switching to a system that does not rely on taxpayers to prepare and file tax returns—a strategy many have suggested would make tax administration less burdensome and would improve compliance, but one that we argue would not be feasible in the United States without significant reform to the U.S. tax code and a boost in IRS resources.

A point worth emphasizing at the outset is that the tax system challenges discussed in this report are not less important or less urgent by virtue of the fact that they are administrative in nature. On the contrary, attention to administrative issues is crucial to good tax policy design. The U.S. tax code is complex because Congress, over time, has deployed the code to advance various social or economic objectives. But these objectives will founder if the government administers the tax system badly or if the American public loses confidence in the government’s ability to manage a funding system that works as intended. Far from being afterthoughts in a discussion of tax policy, the issues explored in this report are central to the long-term health and integrity not only of the U.S. tax system but of the larger civic and political project in which all Americans—as citizens and taxpayers—are engaged.