Recent reports by various tax administrations and committees have revealed that the IRS has wasted billions of dollars on tax credits to illegal immigrants. It is precisely because of this lack of accountability and fraud that proposals like the flat tax and FAIR tax should once again, be considered by those who are serious about reforming our tax system.
Last year, the Treasury Inspector General for Tax Administration (TIGTA) determined $4.2 billion had been given to illegal immigrants in IRS tax credits in 2010. This amount was up significantly from 2005, when just under $1 billion was wasted on this fraudulent use of tax credits. This $1 billion waste prompted Republican-led legislation to prevent the IRS from making such future errors, though the Joint Committee on Taxation (JCT) determined one effort would only save $7.6 billion over ten years.
Unfortunately, things have only gotten worse in the nearly one year since the last report. According to TIGTA, as much as $5.2 billion was given to illegal immigrants through their Individual Taxpayer Identification Numbers (ITIN) in 2011. To make things worse, the TIGTA report says higher-ups at the IRS ignored employee warnings about this particular sort of fraud.
Fraud is practically an accepted part of any federal bureaucracy, and the IRS is no exception. The amount of fraud has jumped significantly in the last year, According to CNN. Some of the reasons fraud has increased are the fault of the IRS. One argument holds that a three percent cut in the IRS’ budget in the 2012 budget left the agency under-resourced and overworked. Whatever the cause, fraud is expected to continue in this particular area of the federal government.
How is this fixed? Well, like the solution to most federal bureaucracies, the easiest solution is to drastically shrink it or simply eliminate it. In this case, two tailor-made solutions already exist: a no-loophole flat tax or the FAIR Tax. Under the flat tax the IRS would shrink dramatically, to the point of basically collecting whatever percentage of your income the federal government taxes. Unlike the FAIR tax, the flat tax would be an easy-to-see, easy-to-calculate mechanism of taxation.
Unfortunately, the flat tax still has the government putting a figurative gun to the head of taxpayers. One advantage of the FAIR tax is it eliminates this forced option– under the FAIR tax, the individual decides how much he or she wants to pay in taxes every time he or she decides to buy products the federal government taxes. The IRS would again be all but eliminated, with a small bureaucracy limited to the collection of taxes and sending out a reimbursement check to all taxpayers.
Either plan would help our economy grow dramatically, and would bring in more tax revenue to help balance the budget as a result. Additionally, through near-elimination of the IRS, this would eliminate most of the IRS’ budget (currently just shy of $12 billion) plus the ITIN-centric $5.2 billion in fraud, as well as any other fraud from the IRS. (Regarding this latter point, even liberals should hop on board with either the flat or FAIR tax proposals – total fraud has estimated at several hundred billion dollars, depending on which report one looks at, and both of these proposals would eliminate most potential fraud in the current system.)
With the economy staggering to something resembling a recovery, and the federal government’s deficits still near record levels, it’s long past time to look at ways to effectively grow the size of the economic pie and lower federal spending. Phasing out the current tax code as we work towards a flat tax or national sales tax would accomplish both goals, albeit the latter in only a limited fashion.