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The IRS has become the Internal Redistribution Service
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Opinion

The IRS has become the Internal Redistribution Service

The IRS’ redistributive function is enormous.

Ask the average American what the Internal Revenue Service’s budget contains, and they’ll likely cite administrative functions like tax enforcement, processing returns and customer service. The truth, however, is that the vast majority of the IRS’ budget goes toward programs that redistribute tax revenue from Citizen A to Citizen B. In fact, the IRS’ welfare component now dwarfs the administrative bureaucracy that was the point of the agency’s very existence.

The administrative cost of running the IRS this year will be close to $15 billion. Two decades ago, that figure was $13 billion, adjusted for inflation. In short, the IRS’ administrative costs have risen modestly. In contrast, the redistributive component of the IRS has gone from an inflation-adjusted $44 billion two decades ago to a projected $216 billion this year. And that doesn’t include $650 billion in COVID-related payments in 2021.

Let’s put those figures in percentage terms since overall federal spending has become so massive that dollar amounts are increasingly difficult to appreciate. The amount of money in the IRS budget devoted to administrative purposes this year will be around 15% higher than it was 20 years ago. That same figure for the IRS’ redistributive spending will be a whopping 390% higher versus 2001.

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What accounts for the dramatic rise in redistribution via the federal government’s tax collector? The answer is the growth in the refundable portions of the earned income tax credit, child tax credit and Affordable Care Act (Obamacare) premium credit, which will account for more than 90% of the redistributive share of the IRS’ budget this year.

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A tax credit that is “refundable” means that if the credit a taxpayer is entitled to exceeds the taxpayer’s overall tax liability, the taxpayer receives money, possibly even up to the full amount of the credit. In other words, refundable tax credits are essentially spending programs under the IRS.

But the refundable share of tax credits is only part of the story. Not contained in the IRS’ budget is the non-refundable portion of tax credits and the various deductions, exemptions and preferences collectively referred to as “tax expenditures.” While some of these provisions, which reduce the tax liability for certain people and businesses, can be justified on the grounds that they correct existing flaws in the tax code, others could be more accurately described as “tax privileges” when their purpose is to target a benefit to a particular special interest. For example, some targeted provisions only benefit rum makers, racetrack operators and producers of particular forms of energy.

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We’re not treading new ground here by noting that there are numerous problems associated with tax privileges, including: non-favored individuals and businesses having to make up the difference in the form of higher taxes, corruptive interests aiming to maintain or obtain special tax treatment, and taxpayers wasting hundreds of billions of dollars to navigate the tax code labyrinth. Yet it’s worth noting that regardless of whether a tax provision is refundable, reductions in one’s tax liability (justifiable or not) also reduce one’s perceived cost of government services.

Just as the federal government’s ability to fund exorbitant spending has been enabled by its ability to issue trillions upon trillions of dollars in debt, that deficit-financing ability has also helped turn the IRS, and the tax code it’s supposed to administer, into the ultimate vote-buying mechanism for politicians on both sides of the aisle.

Alas, just as there’s no popular or political will to cut federal spending, there’s no popular or political will to pursue tax reforms that will help dispel the illusion of federal spending being a free lunch.

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The Biden administration would have us believe that raising taxes on corporations (i.e., real flesh-and-blood people like workers, customers and shareholders) and those with high incomes to finance even greater levels of spending will both foster economic growth and make the tax system fairer. But as the congressional Joint Committee on Taxation recently stated, “Since 1985, the progressivity of the Federal tax system has increased every decade.”

So, in addition to such tax hikes being economically detrimental, the notion that an increasingly smaller contingency of taxpayers can foot an increasingly larger spending appetite is wishful thinking at best. Unfortunately, the best that can be said for many in Congress is that they merely oppose exacerbating a problem that they themselves were instrumental in creating. Previous Republican administrations expanded the IRS’ redistributive role and now some congressional Republicans support going even further. They only disagree with the other side on the details.

Veronique de Rugy is a senior research fellow with the Mercatus Center at George Mason University.

Tad DeHaven is a research analyst with the Mercatus Center.

They wrote this column for The Dallas Morning News.