Beth Garrett, President Obama’s choice to be Assistant Treasury Secretary for Tax Policy, has withdrawn her name from consideration. Beth didn’t say why, except for the usual boilerplate about her “personal family situation.” However, the Bloomberg story on her announcement quotes a friend, lobbyist Jeff Trinca, as saying she pulled out because she was unwilling to put her family through what has become a “harsh” confirmation process.

I’m really angry about this, as are so many others in the tax policy community. Beth would have been a fabulous assistant secretary, knowledgeable, fair, and hard-working. She is highly respected by both Democrats and Republicans and would have been an asset not only to the grossly-understaffed Treasury, but to the country.

While I have known Beth for many years, we are not close friends and I have no idea why she really withdrew. But if it was because she wanted to avoid the meat-grinder confirmation process, it is past time we rethink the way we choose senior government appointees.

I understand partisan politics, and that Washington has become something like Bosnia—an endless round of revenge killings for past slights, real or imagined. Democrats blocked some GOP nominee in 2002, so Republicans will do the same to Obama today.

But this is beyond partisanship. A highly-skilled tax expert agrees to make a huge financial sacrifice and put her personal life on hold, all to do her part to help improve the tax law. For her trouble, she is required to fill out massively intrusive personal disclosure forms (that the new Administration has made even more intrusive). She allows herself to be investigated by the FBI. Senate Finance Committee investigators flyspeck her tax returns. And if anyone finds so much as a math mistake, it is all paraded before the public. Earlier this year, Obama nominee Nancy Killefer had to withdraw her nomination for a top White House post because of a dispute over a few hundred bucks of District of Columbia unemployment tax.

It isn’t just about those who withdraw such as Garrett and Killefer. I know too many other highly-qualified people who are unwilling even to begin the process.

Oddly, people like Garrett and Killefer may be paying the price for Treasury Secretary Tim Geithner’s much more egregious failure to pay taxes he owed. Geithner was confirmed, but his cosmic punishment appears to be that he must now work without senior staff.    

This is madness. There may be no one who can survive a gantlet of congressional investigators without some past sin being discovered. But making a mistake does not make you unfit for government service. The big losers are not the highly qualified lawyers, economists, and scientists who step back from this important work. The losers are the rest of us.      

President Obama wants to change Washington. He could start by demanding that we stand-down on our new-found obsession with pseudo-ethics. The next time a nominee withdraws to avoid disclosure of some trivial error or even a bit of poor judgment, Obama should say, “You know what, my nominee made a mistake and I don’t care. It is not important.”  

 

A basic tenet of public finance holds that people tend to do less of something when it is taxed.  Raise income tax rates and some people will work less. Boost the gas tax and people will drive less. Hike the cigarette tax and people will smoke less.

That inexorable law of demand poses two problems for the taxman. First, taxes distort behavior as people move from taxed activities to those that are taxed less or not at all. Sometimes, as in the case of cigarette taxes, we want to discourage the taxed activity. In other cases, the tax only makes the economy less efficient.  Second, tax avoidance may reduce the revenue gained from a tax increase—or even negate it entirely.  For example, if gasoline sales plummet when gas taxes rise, we get less revenue to build and maintain roads.

But recent research suggests that taxes don’t always have to depress demand. People may not react to tax changes they don’t perceive. If the price change isn’t obvious, homo economicus goes on merrily consuming the same as before.

MIT economist Amy Finkelstein examined the behavior of motorists using toll roads with and without electronic toll payments. Because drivers don’t fork over cash to pay tolls when they use electronic transponders, they are less aware of the cost and their demand is less responsive. Toll revenues, Finkelstein found, are 20 to 40 percent higher with electronic toll payments than under the old cash-only system.

Raj Chetty, Adam Looney, and Kory Kroft compared consumer behavior when sales taxes were included and excluded from marked prices and found an 8 percent drop in demand when people saw the tax-inclusive price on the shelf instead of having the tax added at the cash register. The salience of taxes clearly matters: people don’t react to taxes they don’t see.

Tax complexity might also reduce tax awareness. For example, many taxpayers have no idea whether they will owe the alternative minimum tax (AMT) until their accountant or TurboTax tells them. If they don’t know it’s there, they won’t change behavior and the government doesn’t lose needed revenue. It is the same with the phase-outs of the personal exemption (PEP) and itemized deductions (Pease). They are effectively rate increases that few notice.

Of course, complexity can work the other way too. The energy conservation tax credits in this year’s stimulus bill subsidize the purchase of various “green” products that save energy, ranging from low-e windows to high-efficiency air conditioners. But, as Rosanne Altshuler has pointed out, it’s not easy to figure out whether a specific item qualifies. Sellers will no doubt advertise their qualifying products but more consumers might take the bait if the tax rules were simpler. Similarly, lots of evidence suggests that people don’t take full advantage of tax-deferred savings accounts because of confusing rules and the wide variety of choices available.

Furthermore, taxpayers may be so confused by the rules that they respond in perverse ways.  Some people think that the phaseout of itemized deductions actually reduces the value of additional charitable contributions and mortgage interest deductions.  It doesn’t.  AMT taxpayers may be confused about what is deductible and what isn’t.

I’m not arguing in favor of complexity. Taxpayers don’t trust a tax system they don’t understand. Complexity may reduce compliance, either because people have trouble following the rules or because they think others must benefit from obscure provisions and they should somehow pay less tax too. And we often do want tax provisions to affect people’s behavior.

Nonetheless, complexity may sometimes mask taxes and thus help to raise revenues in a relatively efficient way.

For years, lawmakers have been looking longingly at “the tax gap” as a way to help close the budget deficit. Each year Americans owe as much as $350 billion more in federal taxes than they pay. So, goes the argument, if we can only find ways to collect those dollars, we’d be a long way towards getting the fiscal house back in order.

Sadly, the more covetously the pols eye that $350 billion, the tougher it is for them to get at any of the money. Case in point: President Obama’s 2010 revenue proposals, released yesterday by the Treasury Dept. If ever there was a time to go after this pot of cash, you’d think it would be now considering that Obama is facing an eye-popping 2010 deficit of $1.8 trillion. 

Yet, after scrubbing the Revenue Code, the Administration came up with 16 proposals to improve tax reporting and increase penalties for non-compliance. For all of that, Treasury estimates the IRS would collect an extra $10 billion over 10 years. Separately, the president is also proposing to hire another 800 revenue agents to take a harder look at  sheltering of income overseas. That would generate another $17 billion over the next decade. It is a perfectly good idea to improve enforcement and otherwise crack down on tax cheats. But it isn’t going to do much to close a $350 billion annual gap.

Obama’s effort to drop the hammer (small as it may be) is not made any easier by Congress’ schizophrenia on the subject. In alternate years, it seems, lawmakers are either railing about the jack-booted thugs at IRS who audit their constituents or complaining about widespread abuse by taxpayers. Hard to keep it all straight.

Still, Obama’s effort to close the tax gap is yet more evidence that if Congress and the White House want to increase revenues to balance the budget, they are going to have to raise taxes. Tax cheats will not line up to do their civic duty. Free money is not going to fall from the sky.

The tax gap is real, and it is further evidence that the Revenue Code we have today is stressed to its limits. Congress and the president can only fix it by fixing it, not by tinkering around the edges

A new package of anti-swine flu tax incentives was introduced in the House today. The three-pronged package would provide a new tax credit for businesses that purchase liquid hand sanitizers, make it easier for state and local governments to sell tax-exempt bonds to finance swine flu first-response teams, and provide a new deduction for automobile air handlers.    more »

As a bike freak and a tax geek, you’d think that I’d be thrilled about the new tax break for qualified bicycle-commuting reimbursement. I’ve been riding my bike to work for 30 years, so this new tax expenditure has my name written all over it. The biker in me wants to cry out, “It’s about time!” But the tax geek just groans.   more »

I still haven’t finished my taxes, probably because it is the civic duty I hate the most. It isn’t the paying that bothers me. It is the process. I hate that I have to give a private company $49.95 to help me perform a basic act of citizenship. I hate that I must sit in front of a computer for hours mindlessly typing in numbers. I hate that the Tax Code is an incomprehensible black box. The software asks for a number. I type it in. It appears on a form, and I, more or less, assume it is right. Mostly, I hate that the Tax Code is so damn complicated.    more »

The AIG bonuses are an outrage. But the bigger scandal is that a grandstanding Congress wants to use the tax law to punish the companies that paid them and the employees that got them. If Congress wants to limit bonuses for employees of bailed-out companies, it should just do it. But using the Internal Revenue Code is a truly terrible idea. And dipping into the Code to win political points is worse. Long ago, people were rightly outraged when Richard Nixon tried to turn the IRS into a weapon to punish his enemies. This gotcha tax is another variation on the theme, and nearly as inexcusable. Imagine, for instance, if a GOP Congress retroactively barred people from deducting charitable gifts to Planned Parenthood. Or Democrats imposed a 50 percent surtax on companies that that do security work in Iraq.    more »

Not everyone, it seems, agrees with my assessment of the failure of the Obama Three to properly pay their taxes. I argued that they were among millions of us who got their returns wrong. Others, however, feel they should have known better. From Paul Caron, the esteemed blogger at TaxProf: "These are not rocket-science kinds of tax issues. I take them at their word, but on the other hand, these were not cases of something really esoteric."    more »

In the wake of the tax misadventures of Obama nominees Tim Geithner, Tom Daschle, and Nancy Killefer, the question is, “Can’t anyone inside the Beltway get their taxes right?" Sadly, the answer is, “No, they can’t. And neither can the rest of us.”    more »

Should clergy have the right to stand up in their tax-exempt pulpits and endorse political candidates? For a half century, the answer has been no. But The Washington Post's Peter Slevin reported on Sept. 8 that a conservative group called the Alliance Defense Fund wants to change that.    more »

It is a nice object lesson in how a couple of obscure changes in the tax law can save a few people a lot of money. The IRS has reported that the number of those earning $200,000 or more who paid no taxes rose sharply in 2005. More than 7,300 of these worthies avoided U.S. income tax entirely, two-and-a-half times the year before. About 85,000 paid worldwide taxes of less than 10% of their income.    more »

Senator McCain proposed today to suspend the 18.4 cents per gallon federal excise tax on gasoline between Memorial Day and Labor Day this year. For a moment, forget about whether encouraging fossil fuel burning makes sense during a time of global warming, whether we should raid the highway trust fund when bridges are collapsing for lack of maintenance, or the disconnect between the proposal to cut gasoline taxes and the candidates’ endorsement of “cap-and-trade” limits that would raise gasoline prices.    more »

While the Presidential candidates are campaigning on grandiose and often radical reforms to the current tax system, they are missing out on a simple commonsense reform that would make tax filing easier for millions of Americans.    more »

The IRS is talking about making taxpayer information available online. I am terrified. According to the Don't Mess With Taxes blog, the director of the agency's Office of Electronic Tax Administration, David R. Williams, says that up to three years of returns may be made available to taxpayers as soon as next summer. This is the Service's attempt to be customer-friendly in a 21st century sort of way. And, to some, it may seem like a great convenience. But….    more »

Treasury Secretary Hank Paulson said in a letter to congressional Republicans yesterday that Congress needs to act immediately to enact an Alternative Minimum Tax fix. One reason: It will take 12-13 weeks for the agency to reprogram its computers to account for the change. Huh?    more »