Below, a portion of her 1/20/11 report to Congress:Ms. NO'S REPORT TO CONGRESS
Zero-Based Budgetting
VI. A Zero-Based Budgeting Approach Could Assist Congress in Deciding
Which Tax Breaks and IRS-Administered Social Programs to Retain and
Which to Eliminate.
My suggestion is to approach tax reform in a manner similar to zero-based budgeting.
Under that approach, the starting point would be a tax code without any exclusions or
reductions in income or tax. As discussions proceed, tax breaks and IRS-administered
social programs would be added only if lawmakers decide on balance that the public
policy benefits of running the provision or program through the tax code outweigh the
tax complexity challenges that doing so creates for taxpayers and the IRS. Some tax
provisions and programs will meet this test, while others will not. Factors to consider in
making this assessment include whether the government continues to place a priority
on encouraging the activity for which the tax incentive is provided, whether the incentive
is accomplishing its intended purpose, and whether a tax expenditure is more effective
than a direct expenditure for achieving that purpose.
47
The immediate elimination of certain tax benefits could cause hardships for individuals
or businesses where established pricing or conduct is based on those provisions. For
example, persons who own homes paid a purchase price that took into account the
federal subsidy provided through the mortgage interest deduction. Sudden elimination
of that deduction could cause the value of existing homes to drop substantially. If
Congress decides to eliminate tax incentives in situations like this, transitional relief
should be provided.
In our 2010 Annual Report to Congress, I recommended adoption of a process to
evaluate whether a tax expenditure presents an administrative challenge to the IRS or
taxpayers and the extent to which it achieves its intended purpose.
48
In addition, in our
2009 report I proposed an analytic framework for evaluating whether specific social
47
See National Taxpayer Advocate 2010 Annual Report to Congress, vol. 2, at 101-119 (Evaluate the
Administration of Tax Expenditures).
48
See id.- 14 -
benefit programs – whether for individuals or for businesses – should be run through the
tax system.
49
If, in the context of structural tax reform, we apply this rigorous analytical framework to
all proposed tax expenditures, we will adopt solely those provisions that fulfill a
compelling public policy purpose, that the IRS can effectively administer without undue
burden to taxpayers, and that are designed to capture information to evaluate whether
the benefit achieves its intended public policy outcome. Importantly, taxpayers and
policymakers will thus understand why such a provision is included in the tax code and
will be able to ascertain its effectiveness.
This approach, at a conceptual level, is similar to two other proposals presented during
the past year. In December 2010, the National Commission on Fiscal Responsibility
and Reform issued a report that, among other things, also recommended a zero-based
budgeting approach to tax reform.
50
In February 2010, Senators Wyden and Gregg
introduced legislation that would substantially revamp the tax code.
51
While we do not
endorse specific proposals, we think both are thoughtful and worthy starting points.
We are not so naïve as to suggest that all tax expenditures will be eliminated, even in
the most robust tax reform effort. In fact, there are excellent public policy or
administrative reasons for including some programs in the tax code – whether they
benefit individuals, small businesses, or entire industries.
52
And we believe that given
adequate lead time, proper design, and sufficient resources, the IRS can successfully
administer many of these programs without unduly burdening taxpayers or itself.
53
But
49
National Taxpayer Advocate 2009 Annual Report to Congress, Vol. 2, at 75-104 (Running Social
Programs Through the Tax System). Among other factors, we suggested that Congress consider the
IRS’s existing relationship with and access to the targeted population as well as the additional burden
imposed on that population, the IRS’s ability to deliver the benefit in a timely manner and at the
appropriate time, the IRS’s access to information necessary to make an eligibility determination, and the
IRS’s suitability to be the administrator of the provision in light of its enforcement culture.
50
See National Commission on Fiscal Responsibility and Reform, A Moment of Truth, at 28-34
(Dec. 2010) at http://www.fiscalcommission.gov/news/moment-truth-report-national-commission-fiscalresponsibility-and-reform. The mandate of the commission was to address the nation’s long-term fiscal
challenges, and as a result, its tax reform recommendations are partly designed to increase revenue. It is
beyond the mission of the National Taxpayer Advocate to take a position on these broader fiscal issues.
51
Bipartisan Tax Fairness and Simplification Act, S. 3018, 111
th
Cong. (2010).
52
For example, the IRS in some cases already has access to all the financial or other data necessary to
determine eligibility for a benefit. If another agency were tasked with administering the benefit, the
beneficiary would be required to submit the information twice (once to the IRS and once to another
agency) or the IRS would be directed to share confidential tax return information, which would impose
administrative burden on two agencies and could undermine future tax compliance.
53
In our 2010 Annual Report to Congress, we recommended that the IRS revise its mission statement to
explicitly acknowledge and describe its dual mission of collecting taxes and delivering social benefits. We
believe that recognition of the IRS’s dual role will help ensure that the IRS is adequately funded to deliver
all of its programs and cause it to shift its emphasis from primarily enforcement to providing better service
and assistance to its taxpayers and beneficiaries as well. See National Taxpayer Advocate 2010 Annual - 15 -
the tax system will run much more smoothly if only tax benefits and social programs that
withstand this analysis are included in the tax code.
Two additional notes: In a presentation to the President’s Advisory Panel on Federal
Tax Reform in 2005, I laid out certain principles for tax reform that I view as important
from a taxpayer perspective.
54
These principles are included as Appendix B. In
addition, the National Taxpayer Advocate's Annual Reports to Congress over the past
decade have offered numerous proposals to simplify various sections or areas of the tax
code. While these proposals were not written with the goal of comprehensive structural
tax reform in mind, they provide an additional illustration of tax-law complexity and
should serve as a checklist to ensure that key areas of complexity are addressed in tax
reform legislation. A summary of these proposals is included as Appendix C.
VI. A Zero-Based Budgeting Approach Could Assist Congress in Deciding
Which Tax Breaks and IRS-Administered Social Programs to Retain and
Which to Eliminate.
My suggestion is to approach tax reform in a manner similar to zero-based budgeting.
Under that approach, the starting point would be a tax code without any exclusions or
reductions in income or tax. As discussions proceed, tax breaks and IRS-administered
social programs would be added only if lawmakers decide on balance that the public
policy benefits of running the provision or program through the tax code outweigh the
tax complexity challenges that doing so creates for taxpayers and the IRS. Some tax
provisions and programs will meet this test, while others will not. Factors to consider in
making this assessment include whether the government continues to place a priority
on encouraging the activity for which the tax incentive is provided, whether the incentive
is accomplishing its intended purpose, and whether a tax expenditure is more effective
than a direct expenditure for achieving that purpose.
47
The immediate elimination of certain tax benefits could cause hardships for individuals
or businesses where established pricing or conduct is based on those provisions. For
example, persons who own homes paid a purchase price that took into account the
federal subsidy provided through the mortgage interest deduction. Sudden elimination
of that deduction could cause the value of existing homes to drop substantially. If
Congress decides to eliminate tax incentives in situations like this, transitional relief
should be provided.
In our 2010 Annual Report to Congress, I recommended adoption of a process to
evaluate whether a tax expenditure presents an administrative challenge to the IRS or
taxpayers and the extent to which it achieves its intended purpose.
48
In addition, in our
2009 report I proposed an analytic framework for evaluating whether specific social
47
See National Taxpayer Advocate 2010 Annual Report to Congress, vol. 2, at 101-119 (Evaluate the
Administration of Tax Expenditures).
48
See id.- 14 -
benefit programs – whether for individuals or for businesses – should be run through the
tax system.
49
If, in the context of structural tax reform, we apply this rigorous analytical framework to
all proposed tax expenditures, we will adopt solely those provisions that fulfill a
compelling public policy purpose, that the IRS can effectively administer without undue
burden to taxpayers, and that are designed to capture information to evaluate whether
the benefit achieves its intended public policy outcome. Importantly, taxpayers and
policymakers will thus understand why such a provision is included in the tax code and
will be able to ascertain its effectiveness.
This approach, at a conceptual level, is similar to two other proposals presented during
the past year. In December 2010, the National Commission on Fiscal Responsibility
and Reform issued a report that, among other things, also recommended a zero-based
budgeting approach to tax reform.
50
In February 2010, Senators Wyden and Gregg
introduced legislation that would substantially revamp the tax code.
51
While we do not
endorse specific proposals, we think both are thoughtful and worthy starting points.
We are not so naïve as to suggest that all tax expenditures will be eliminated, even in
the most robust tax reform effort. In fact, there are excellent public policy or
administrative reasons for including some programs in the tax code – whether they
benefit individuals, small businesses, or entire industries.
52
And we believe that given
adequate lead time, proper design, and sufficient resources, the IRS can successfully
administer many of these programs without unduly burdening taxpayers or itself.
53
But
49
National Taxpayer Advocate 2009 Annual Report to Congress, Vol. 2, at 75-104 (Running Social
Programs Through the Tax System). Among other factors, we suggested that Congress consider the
IRS’s existing relationship with and access to the targeted population as well as the additional burden
imposed on that population, the IRS’s ability to deliver the benefit in a timely manner and at the
appropriate time, the IRS’s access to information necessary to make an eligibility determination, and the
IRS’s suitability to be the administrator of the provision in light of its enforcement culture.
50
See National Commission on Fiscal Responsibility and Reform, A Moment of Truth, at 28-34
(Dec. 2010) at http://www.fiscalcommission.gov/news/moment-truth-report-national-commission-fiscalresponsibility-and-reform. The mandate of the commission was to address the nation’s long-term fiscal
challenges, and as a result, its tax reform recommendations are partly designed to increase revenue. It is
beyond the mission of the National Taxpayer Advocate to take a position on these broader fiscal issues.
51
Bipartisan Tax Fairness and Simplification Act, S. 3018, 111
th
Cong. (2010).
52
For example, the IRS in some cases already has access to all the financial or other data necessary to
determine eligibility for a benefit. If another agency were tasked with administering the benefit, the
beneficiary would be required to submit the information twice (once to the IRS and once to another
agency) or the IRS would be directed to share confidential tax return information, which would impose
administrative burden on two agencies and could undermine future tax compliance.
53
In our 2010 Annual Report to Congress, we recommended that the IRS revise its mission statement to
explicitly acknowledge and describe its dual mission of collecting taxes and delivering social benefits. We
believe that recognition of the IRS’s dual role will help ensure that the IRS is adequately funded to deliver
all of its programs and cause it to shift its emphasis from primarily enforcement to providing better service
and assistance to its taxpayers and beneficiaries as well. See National Taxpayer Advocate 2010 Annual - 15 -
the tax system will run much more smoothly if only tax benefits and social programs that
withstand this analysis are included in the tax code.
Two additional notes: In a presentation to the President’s Advisory Panel on Federal
Tax Reform in 2005, I laid out certain principles for tax reform that I view as important
from a taxpayer perspective.
54
These principles are included as Appendix B. In
addition, the National Taxpayer Advocate's Annual Reports to Congress over the past
decade have offered numerous proposals to simplify various sections or areas of the tax
code. While these proposals were not written with the goal of comprehensive structural
tax reform in mind, they provide an additional illustration of tax-law complexity and
should serve as a checklist to ensure that key areas of complexity are addressed in tax
reform legislation. A summary of these proposals is included as Appendix C.
VI. A Zero-Based Budgeting Approach Could Assist Congress in Deciding
Which Tax Breaks and IRS-Administered Social Programs to Retain and
Which to Eliminate.
My suggestion is to approach tax reform in a manner similar to zero-based budgeting.
Under that approach, the starting point would be a tax code without any exclusions or
reductions in income or tax. As discussions proceed, tax breaks and IRS-administered
social programs would be added only if lawmakers decide on balance that the public
policy benefits of running the provision or program through the tax code outweigh the
tax complexity challenges that doing so creates for taxpayers and the IRS. Some tax
provisions and programs will meet this test, while others will not. Factors to consider in
making this assessment include whether the government continues to place a priority
on encouraging the activity for which the tax incentive is provided, whether the incentive
is accomplishing its intended purpose, and whether a tax expenditure is more effective
than a direct expenditure for achieving that purpose.
47
The immediate elimination of certain tax benefits could cause hardships for individuals
or businesses where established pricing or conduct is based on those provisions. For
example, persons who own homes paid a purchase price that took into account the
federal subsidy provided through the mortgage interest deduction. Sudden elimination
of that deduction could cause the value of existing homes to drop substantially. If
Congress decides to eliminate tax incentives in situations like this, transitional relief
should be provided.
In our 2010 Annual Report to Congress, I recommended adoption of a process to
evaluate whether a tax expenditure presents an administrative challenge to the IRS or
taxpayers and the extent to which it achieves its intended purpose.
48
In addition, in our
2009 report I proposed an analytic framework for evaluating whether specific social
47
See National Taxpayer Advocate 2010 Annual Report to Congress, vol. 2, at 101-119 (Evaluate the
Administration of Tax Expenditures).
48
See id.- 14 -
benefit programs – whether for individuals or for businesses – should be run through the
tax system.
49
If, in the context of structural tax reform, we apply this rigorous analytical framework to
all proposed tax expenditures, we will adopt solely those provisions that fulfill a
compelling public policy purpose, that the IRS can effectively administer without undue
burden to taxpayers, and that are designed to capture information to evaluate whether
the benefit achieves its intended public policy outcome. Importantly, taxpayers and
policymakers will thus understand why such a provision is included in the tax code and
will be able to ascertain its effectiveness.
This approach, at a conceptual level, is similar to two other proposals presented during
the past year. In December 2010, the National Commission on Fiscal Responsibility
and Reform issued a report that, among other things, also recommended a zero-based
budgeting approach to tax reform.
50
In February 2010, Senators Wyden and Gregg
introduced legislation that would substantially revamp the tax code.
51
While we do not
endorse specific proposals, we think both are thoughtful and worthy starting points.
We are not so naïve as to suggest that all tax expenditures will be eliminated, even in
the most robust tax reform effort. In fact, there are excellent public policy or
administrative reasons for including some programs in the tax code – whether they
benefit individuals, small businesses, or entire industries.
52
And we believe that given
adequate lead time, proper design, and sufficient resources, the IRS can successfully
administer many of these programs without unduly burdening taxpayers or itself.
53
But
49
National Taxpayer Advocate 2009 Annual Report to Congress, Vol. 2, at 75-104 (Running Social
Programs Through the Tax System). Among other factors, we suggested that Congress consider the
IRS’s existing relationship with and access to the targeted population as well as the additional burden
imposed on that population, the IRS’s ability to deliver the benefit in a timely manner and at the
appropriate time, the IRS’s access to information necessary to make an eligibility determination, and the
IRS’s suitability to be the administrator of the provision in light of its enforcement culture.
50
See National Commission on Fiscal Responsibility and Reform, A Moment of Truth, at 28-34
(Dec. 2010) at http://www.fiscalcommission.gov/news/moment-truth-report-national-commission-fiscalresponsibility-and-reform. The mandate of the commission was to address the nation’s long-term fiscal
challenges, and as a result, its tax reform recommendations are partly designed to increase revenue. It is
beyond the mission of the National Taxpayer Advocate to take a position on these broader fiscal issues.
51
Bipartisan Tax Fairness and Simplification Act, S. 3018, 111
th
Cong. (2010).
52
For example, the IRS in some cases already has access to all the financial or other data necessary to
determine eligibility for a benefit. If another agency were tasked with administering the benefit, the
beneficiary would be required to submit the information twice (once to the IRS and once to another
agency) or the IRS would be directed to share confidential tax return information, which would impose
administrative burden on two agencies and could undermine future tax compliance.
53
In our 2010 Annual Report to Congress, we recommended that the IRS revise its mission statement to
explicitly acknowledge and describe its dual mission of collecting taxes and delivering social benefits. We
believe that recognition of the IRS’s dual role will help ensure that the IRS is adequately funded to deliver
all of its programs and cause it to shift its emphasis from primarily enforcement to providing better service
and assistance to its taxpayers and beneficiaries as well. See National Taxpayer Advocate 2010 Annual - 15 -
the tax system will run much more smoothly if only tax benefits and social programs that
withstand this analysis are included in the tax code.
Two additional notes: In a presentation to the President’s Advisory Panel on Federal
Tax Reform in 2005, I laid out certain principles for tax reform that I view as important
from a taxpayer perspective.
54
These principles are included as Appendix B. In
addition, the National Taxpayer Advocate's Annual Reports to Congress over the past
decade have offered numerous proposals to simplify various sections or areas of the tax
code. While these proposals were not written with the goal of comprehensive structural
tax reform in mind, they provide an additional illustration of tax-law complexity and
should serve as a checklist to ensure that key areas of complexity are addressed in tax
reform legislation. A summary of these proposals is included as Appendix C.
VI. A Zero-Based Budgeting Approach Could Assist Congress in Deciding
Which Tax Breaks and IRS-Administered Social Programs to Retain and
Which to Eliminate.
My suggestion is to approach tax reform in a manner similar to zero-based budgeting.
Under that approach, the starting point would be a tax code without any exclusions or
reductions in income or tax. As discussions proceed, tax breaks and IRS-administered
social programs would be added only if lawmakers decide on balance that the public
policy benefits of running the provision or program through the tax code outweigh the
tax complexity challenges that doing so creates for taxpayers and the IRS. Some tax
provisions and programs will meet this test, while others will not. Factors to consider in
making this assessment include whether the government continues to place a priority
on encouraging the activity for which the tax incentive is provided, whether the incentive
is accomplishing its intended purpose, and whether a tax expenditure is more effective
than a direct expenditure for achieving that purpose.
47
The immediate elimination of certain tax benefits could cause hardships for individuals
or businesses where established pricing or conduct is based on those provisions. For
example, persons who own homes paid a purchase price that took into account the
federal subsidy provided through the mortgage interest deduction. Sudden elimination
of that deduction could cause the value of existing homes to drop substantially. If
Congress decides to eliminate tax incentives in situations like this, transitional relief
should be provided.
In our 2010 Annual Report to Congress, I recommended adoption of a process to
evaluate whether a tax expenditure presents an administrative challenge to the IRS or
taxpayers and the extent to which it achieves its intended purpose.
48
In addition, in our
2009 report I proposed an analytic framework for evaluating whether specific social
47
See National Taxpayer Advocate 2010 Annual Report to Congress, vol. 2, at 101-119 (Evaluate the
Administration of Tax Expenditures).
48
See id.- 14 -
benefit programs – whether for individuals or for businesses – should be run through the
tax system.
49
If, in the context of structural tax reform, we apply this rigorous analytical framework to
all proposed tax expenditures, we will adopt solely those provisions that fulfill a
compelling public policy purpose, that the IRS can effectively administer without undue
burden to taxpayers, and that are designed to capture information to evaluate whether
the benefit achieves its intended public policy outcome. Importantly, taxpayers and
policymakers will thus understand why such a provision is included in the tax code and
will be able to ascertain its effectiveness.
This approach, at a conceptual level, is similar to two other proposals presented during
the past year. In December 2010, the National Commission on Fiscal Responsibility
and Reform issued a report that, among other things, also recommended a zero-based
budgeting approach to tax reform.
50
In February 2010, Senators Wyden and Gregg
introduced legislation that would substantially revamp the tax code.
51
While we do not
endorse specific proposals, we think both are thoughtful and worthy starting points.
We are not so naïve as to suggest that all tax expenditures will be eliminated, even in
the most robust tax reform effort. In fact, there are excellent public policy or
administrative reasons for including some programs in the tax code – whether they
benefit individuals, small businesses, or entire industries.
52
And we believe that given
adequate lead time, proper design, and sufficient resources, the IRS can successfully
administer many of these programs without unduly burdening taxpayers or itself.
53
But
49
National Taxpayer Advocate 2009 Annual Report to Congress, Vol. 2, at 75-104 (Running Social
Programs Through the Tax System). Among other factors, we suggested that Congress consider the
IRS’s existing relationship with and access to the targeted population as well as the additional burden
imposed on that population, the IRS’s ability to deliver the benefit in a timely manner and at the
appropriate time, the IRS’s access to information necessary to make an eligibility determination, and the
IRS’s suitability to be the administrator of the provision in light of its enforcement culture.
50
See National Commission on Fiscal Responsibility and Reform, A Moment of Truth, at 28-34
(Dec. 2010) at http://www.fiscalcommission.gov/news/moment-truth-report-national-commission-fiscalresponsibility-and-reform. The mandate of the commission was to address the nation’s long-term fiscal
challenges, and as a result, its tax reform recommendations are partly designed to increase revenue. It is
beyond the mission of the National Taxpayer Advocate to take a position on these broader fiscal issues.
51
Bipartisan Tax Fairness and Simplification Act, S. 3018, 111
th
Cong. (2010).
52
For example, the IRS in some cases already has access to all the financial or other data necessary to
determine eligibility for a benefit. If another agency were tasked with administering the benefit, the
beneficiary would be required to submit the information twice (once to the IRS and once to another
agency) or the IRS would be directed to share confidential tax return information, which would impose
administrative burden on two agencies and could undermine future tax compliance.
53
In our 2010 Annual Report to Congress, we recommended that the IRS revise its mission statement to
explicitly acknowledge and describe its dual mission of collecting taxes and delivering social benefits. We
believe that recognition of the IRS’s dual role will help ensure that the IRS is adequately funded to deliver
all of its programs and cause it to shift its emphasis from primarily enforcement to providing better service
and assistance to its taxpayers and beneficiaries as well. See National Taxpayer Advocate 2010 Annual - 15 -
the tax system will run much more smoothly if only tax benefits and social programs that
withstand this analysis are included in the tax code.
Two additional notes: In a presentation to the President’s Advisory Panel on Federal
Tax Reform in 2005, I laid out certain principles for tax reform that I view as important
from a taxpayer perspective.
54
These principles are included as Appendix B. In
addition, the National Taxpayer Advocate's Annual Reports to Congress over the past
decade have offered numerous proposals to simplify various sections or areas of the tax
code. While these proposals were not written with the goal of comprehensive structural
tax reform in mind, they provide an additional illustration of tax-law complexity and
should serve as a checklist to ensure that key areas of complexity are addressed in tax
reform legislation. A summary of these proposals is included as Appendix C.
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