JonLowder.com

IRS Should Just Hire a Bunch of Direct Marketers and Listen to My Mom

During a show about how much tax revenue the IRS doesn't collect - 17% or $450 billion a year - the folks at Freakonomics talk about how a little-known unit of the British government called the Behavioral Insights Unit gooses the UK's tax collection efforts:

One of my favorite examples of this comes from a small unit in the British government called the Behavioral Insights Team.  What they do is experiment with all kinds of cheap and simple nudges.  For instance, sending out letters that appeal to the herd mentality in all of us. Here is the unit’s director, David Halpern:

David HALPERN: So what we do is we simply tell people something, which is true, which is 9 out of 10 people in Britain pay their tax on time. And by putting that single bit of information into the top of a letter, it makes people much more likely themselves to pay the tax on time.

GARDNER: So it’s peer pressure?

DUBNER: That’s exactly right — we like to run with the herd.  They also tried another super simple trick, which was just handwriting a message on the outside of the tax envelope.  This message would just say simply that the contents are important, but it’s written in hand.

HALPERN: Of course people are like ‘oh my God, but how can that possibly be practical?’ Well we’ve now just got the results in. It turns out that for every pound or every dollar that you spend on getting, you know, someone to write on the envelope, you get $2,000 return.  A one to 2,000 return. So it’s a nice simple illustration of these small things and how consequential they are.

Anyone who's spent even a week working as a direct marketer could have told you this would work. The IRS should just hire a bunch of laid off direct marketing folks and they'd pay for themselves in no time.

Later in the podcast they talk about an idea from a behavioral psychiatrist at Duke:

Dan Ariely, a behavioral psychologist at Duke, has a nice idea: to let taxpayers direct a small portion of their tax money to the parts of the government that they most care about:

Dan ARIELY: So I’m not sure what’s the right percent — five percent or ten percent.  But what if we got people to have a say about where some of the taxes go? All of a sudden you’re not looking at it as you against the government.  You’d have to look carefully at all that the government is doing for us — building libraries and roads, and education and military and so on and so forth and say, what do I care about?

My mother made this same argument when I was a kid. Her argument was that if she could earmark even one or two percent for any program/department of her choosing she'd feel better about paying her taxes in general. She also made another interesting point: taxpayers would be able to indicate with their dollars which programs they felt were most important. In essence we'd be able to tell which programs were truly valued by us, the taxpayers, and not have to trust politicians to divine what we wanted. That's why I figured it would never come to pass, and I haven't been wrong yet.

Starving the Beast

Those of us old enough to remember the Reagan years can probably remember hearing the phrase "Starving the Beast." What did it mean? From Wikipedia:

Starving the beast" is a political strategy employed by American conservatives in order to limit government spending^[1][2][3] by cutting taxes in order to deprive the government of revenue in a deliberate effort to force the federal government to reduce spending. The short and medium term effect of the strategy has dramatically increased the United States public debt rather than reduce spending .

Those of us still around to see what happens when terms like "fiscal cliff" and "sequestration" enter the lexicon are able to see what will happen when the starvation takes hold:

Imagine that just before Thanksgiving a major retailer, say Nordstrom or Wal-Mart, announced it would furlough 10 percent of its sales, collections and accounts payable staffs.

The stock would tank. Indeed, it is hard to imagine the CEO or the board of directors keeping their jobs as customers switched to other retailers during the holiday buying season, costing the company revenues far in excess of the savings. Not only would the corporate overseers become everyday laughing stocks, they would surely be enshrined in a Harvard Business School case study as the worst of all corporate dunces.

Well, on March 1 -- right in the middle of tax season -- the IRS will be faced with cutting staff ten percent under the federal budget sequester...

Rational people would think that a law-enforcement agency which saved taxpayers more than 150% of its budget would get some support from Congress because its highly cost-effective. The operative word there is rational.

House Appropriations Committee Democrats on Feb. 13 offered these rational observations on what sequester would do to the IRS and to taxpayers: 

• Sequestration will be particularly devastating to the IRS, since it will require furloughs to take effect during the 2012 filing season. Furloughs at IRS call centers equate to longer hold times on the phone for taxpayers, if the call is answered at all. Fewer enforcement agents will be available to investigate fraudulent claims, leading to an increase in the number of identity theft cases unresolved. Further, each dollar invested in enforcement actions returns $4 in additional revenue to the Treasury. Cutting investment in enforcement will lead directly to an increase in the deficit.

It's hard to generate any sympathy for the IRS, but if we must have an IRS (as we must) then we should make sure it has what it needs to complete its mission.