Was Don Alexander Right: Should We Stop Using the IRS to Run Social Programs?

By :: April 19th, 2010

As I contemplate the furor over the Tax Policy Center’s calculation that 47 percent of Americans owed no income tax in 2009, I am reminded of Don Alexander, who was an IRS Commissioner during the Nixon and Ford Administrations. For decades Don, who passed away last year, argued passionately that the IRS’s job is to collect tax revenues, and not administer social programs. And that conflict is at the root of the 47 percent controversy.

 

The share of Americans owing income tax has dropped so much in recent years mainly because of increased spending through the tax code – expansion of the earned income credit, introduction and expansion of the child credit, and President Obama’s making work pay credit. All of these programs are defensible – but as spending programs to achieve public policy objectives, not as measures to promote a fair distribution of the tax burden based on ability to pay. 

 

In 2002, Don and I served on a working group that produced a Century Foundation-sponsored report called “Bad Breaks All Around.”  The study critiqued tax expenditures – provisions in the revenue code that provide special benefits for certain industries or activities.

 

The panel agreed that tax expenditures in general are problematic. They distort economic decisions, often benefit high-income individuals and corporations disproportionately, and subvert the budget process by enabling backdoor spending through the tax code. But most members liked some tax expenditures – especially the earned income credit (EITC), a substantial benefit for low-income working families. Several reasons, including administrative convenience, were advanced as to why it is best to administer this assistance through the tax code.  I am among those who have asserted that a tax incentive is sometimes better than a direct outlay as a way to administer a government subsidy program.

 

Don disagreed. He was not opposed in principle to federal subsidies for low-income working families.  But he believed that the purpose of the tax code was simply to raise revenue to fund public programs and that it was not the IRS’ job to administer social programs. Don argued with Milton Friedman about this when the EITC was first proposed in the 1970s – and lost when President Ford backed the EITC.

 

Perception matters.  Tax wonks can argue until they are blue in the face that these programs are spending and that recipients of these subsidies are really paying positive taxes before getting their benefits. I totally agree with this logic, but it is a tough sell.

 

I recall an equally tough sell when President Reagan greatly expanded investment tax incentives in the 1981 tax cut bill.  Some smart tax lawyers realized that corporations in a loss position could not use these benefits, so they persuaded Congress to enact a “safe harbor leasing” provision that effectively enabled these companies to sell their tax benefits to profitable corporations that could use them. The result that large profitable corporations ended up paying no income tax generated a public uproar, not unlike today’s, although it was driven by very different political forces and directed at a much different target. It did not matter how much Treasury tried to explain the logic of allowing these transactions. Nor did it matter that the sellers of the tax benefits, not the profitable companies buying them, reaped most of the benefits. Safe harbor leasing was repealed in 1982.

 

So we may have to reconsider how we provide benefits to low-income and other households. People will look at how much different taxpayers remit to the IRS – no matter how much we explain that some provisions are really spending, not taxes, or that the real beneficiaries are not always those who send a smaller check to the IRS.  As the behavioral economists now remind us, perception often counts as much or more than reality.

 

By the way, Don Alexander should be remembered mainly for his courageous efforts to resist efforts by the Nixon White House to use the tax agency to punish the president’s perceived enemies. Don reminded me that Nixon was not the first president to do this. But thanks to Don’s efforts, he may turn out to have been the last.

 

5Comments

  1. Anonymous  ::  8:45 pm on April 19th, 2010:

    The main advatage to using the tax system is that it allows the kind of redistribution of wages toward larger families that would not otherwise exist in the private market. In other words, they can be used to correct market failure in the labor market. The larger the child tax credit, the more the tax system can be use to stop such preverse decisions as firing a perfectly productive 40 year old with kids in favor of hiring two recent college grads for the same price. If part of the salary of the 40 year old was in payment for his or her kids, the incentive to send him backing is reduced. It is reduced even more so if we allowed or encouraged more compensation in the form of stock – so that longevity pay would come entirely from dividends and not annual wage increases. We would still collect taxes on the dividends and the base salary, but not on the tax credits.

  2. Leroy  ::  1:20 pm on September 20th, 2011:

    What you advocate is yet even more government involvement in everyone’s lives, not to mention even more complications for an already incredibly complex web of tax laws. No, the answer that no one seems to understand is that spending needs to be reduced. It is this spending, along with the unconscionable inflation of the money supply by the Fed, that will and in some cases, is, resulting in higher costs of living for the very poor souls that this tax policy purports to be trying to help. Unless we start paying for what we collectively receive from the government, this cycle will never end.

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