Home inFocus Campaign Season ­­– Issues on the Trail (Summer 2016) Income Inequality: Can the Tax Code Address It?

Income Inequality: Can the Tax Code Address It?

Eileen J. O'Connor Summer 2016

How to help the less fortunate is a question never far from the minds of most people. In election years, people running for public office tout their proposed solutions. Solutions attempted in past years – like LBJ’s “War on Poverty” – have focused on helping the needy. Policy prescriptions coming from this year’s Democrat candidates for the Presidency and other federal offices are not so modest. They aim at both ends of the income and wealth spectrum. That is, rather than focus solely on helping the poor move up the income and wealth scale, they are determined to bring the rich down the scale. As with just about every question lawmakers face, the tool of choice to accomplish these goals is the Tax Code: increase income taxes collected from the rich, and increase “refundable tax credits” paid to the poor.

For reasons explained later, using the Tax Code, and therefore the Internal Revenue Service, to administer social welfare policy is immoral, ineffective, inefficient, impractical, irresponsible, and illegal.

But first, some background.

There is afoot in America today a dangerous, destructive, and foolish effort to demonize those who are reaping the rewards of making our lives better, an effort to create resentment in those who have not yet been on the receiving end of the rewards those people enjoy.

Of course, not everyone with wealth earned it. Sometimes they are merely related in some way to the one who did. Like the children and other descendants of Joe – who made a fortune pumping and dumping stocks and trading on insider information – and Rose Kennedy.

But those of us who have not created or otherwise acceded to wealth are better advised to earn it ourselves – which we can do, by providing a good or service to those who have it – than to urge the government to take it from the rich and give it to us. When the rich pay us for something we have provided them, they get something in return. When the government takes from them to give to us, what do they get in return, except perhaps resentment, and less with which to pay us for the a good or service with which we would like to earn it.

Another way wealth is redistributed from those who have it to those who don’t is by the former’s charity, and the latter’s being deserving of it. A government cannot take over the function of charity. When it tries to, it impoverishes the souls both of those who can afford to be generous, and of those who need the generosity. True charity enriches both the giver and the receiver. It arises from or creates a bond of caring and of gratitude. A government handout does neither. Not only does it not enrich, it corrodes.

There have always been very rich and very poor people. The ones in the middle are those who manage to provide a good or service for which those who can afford it are willing to pay them.

In the United States, a Rockefeller gets rich because he discovers, extracts, and refines crude oil (which had the side effect of saving whales, which until then were hunted almost to extinction and killed for blubber to burn in lamps). His discovery helped fuel the cars Henry Ford created a mass production system to produce. Most of us have used a computer system that runs on a Microsoft product. Thank you, Bill Gates. And most of us have had more than one of the things we never dreamed of, but now find indispensable. Thank you, Steve Jobs.

But we don’t have to SAY thank you, because we have already spoken with our purchases. And those purchases have represented our voluntary redistribution of our hard earned dollars into the pockets of the person who created or made available something we valued. Thank you, Mrs. Fields for your cookies. Thank you, Fred Smith, for creating Federal Express to get our packages from one place to another without delay and in a way we can track them. And thank you, James Casey, for founding UPS, which brings us all that stuff we can’t live without for another day from Amazon. Thank you, Jeff Bezos.

The Prevalence of Inequality

Inequality cannot be eliminated; it must be acknowledged and dealt with. And there are many reasons for it. Charles Murray wrote a scholarly and compassionate book on the topic a few years ago and was subjected to brutal mischaracterizations and scorn. But inequality is a fact of every facet of life. Every time the value of Facebook stock rises, Mark Zuckerberg’s wealth rises more than anyone else’s does, further increasing the wealth and income gap.

Any businessman will repeat to you the maxim you probably learned in school and he’s learned through experience: 80% of your business comes from 20% of your customers. 80% of your new customers were rustled up by 20% of your salesmen. Did you also know that 80% of the home runs in professional baseball are hit by 20% of the hitters?

There is not a facet of life in which it cannot be said that a few people do very well, many do all right, and lots of people don’t do well at all.

And now, here is your summary of why using the Tax Code, and therefore the Internal Revenue Service, to redistribute income is immoral, ineffective, inefficient, impractical, irresponsible, and illegal.


Making charity a government function makes it an impersonal function. It robs both the giver and the receiver of the rightful consequences of their acts of generosity and of the acceptance of generosity. 

It is spiritually soothing to feel gratitude for a kindness one is shown, and emotionally encouraging to appreciate that a person has cared enough to help you out, and wants better things for you. And it is gratifying to be able to help someone in need. Government programs eliminate all of that, especially when the politicians constantly proclaim they are the source of all good things and evil rich people are the reason the poor don’t have more in the first place.

Having the federal government involved makes the relief so remote as to eliminate the redemptive consequences of personal charity for both the giver and the receiver. Think of the Cleveland residents interviewed a few years ago about their “Obamaphones.” Even though the phone program commenced in an earlier Administration, the residents believed President (and then Presidential candidate) Obama personally provided the phones, and had purchased them out of his own personal “stash.” They do not understand that the phones are paid for by money the government takes away from their productive neighbors, so they feel no gratitude toward the people who are actually helping them. And they feel no incentive to become self-reliant. Why should they? On the other side of the transaction, the people footing the bill see this ignorant ingratitude, and are justified if they feel resentful.


If the IRS is responsible for a program, then the program must of necessity boil down to purely objective facts – numbers, in particular. If the IRS is to determine a person’s eligibility for a government payment, eligibility must boil down to mere numbers. And the determination of the amount of the payment must similarly boil down to mere numbers.

Government relief programs are not effective in the long-term, and are often counter-productive. The old saying “you get what you pay for” applies to government programs as much as it does to everyday purchases. Data have shown, for example, that when you pay women more if they have children without fathers, that’s what you get – more children without fathers. In the early days of welfare, poor women quickly figured out that Uncle Sam was going to be a better provider, and made sure the fathers of their children didn’t hang around to void their eligibility in the days of the “no man in the house” rule. Congress accepted and dealt with this to some extent in the welfare reforms of 1996, but President Obama eliminated many of them by Executive Order.

Although need has many causes, it is clear that a program administered by the IRS will deal with none of them. So while the government program might ameliorate need in the very short term, it provides only temporary relief. Who is doing the better thing: the person who offers you an aspirin for your discomfort, or the person who helps you remove the pebble from your shoe? Who is less likely to be poor a year from now: the beggar to whom you give money on the street, or the person the Salvation Army teaches how to work?


Of the six I’s in this litany, inefficiency is the only one proponents of running social welfare programs through the Tax Code, and therefore having the IRS administer them, address. They say it is efficient to do so. But is it? 

It appears that when Congress gives the IRS a program to administer, it does not ask it to capture and report on the cost of that administration. And so it doesn’t. The IRS 2014 budget request mentions the earned income tax credit (EITC) only twice, each time in connection with compliance and fraud detection activities.

Reports about social programs talk about how much they cost. But when they refer to the cost, they are only referring to the amount of money that is given to recipients. It seems that no one is counting what it costs to get those dollars or other government payments into the hands of the recipients. But anyone who gives to charity these days knows to check with Charity Navigator or GuideStar or a similar source to learn how efficient a charity is as compared to others with the same objectives. When you learn that 85% of your contribution to Charity X goes to the fundraisers and not to the intended objects of your charity, you stop giving to that one, and seek out one that is more efficient.

Not Congress. Fully 25% of the amounts the IRS has paid as EITC have been to ineligible recipients, and 15% to 25% of the people who are eligible for it are not receiving it. What are the odds a privately operated charitable enterprise would tolerate such a sorry level of performance?

A recent teleconference co-sponsored by the Civil Rights and Social Justice and the Taxation Sections of the American Bar Association promised to address “how changes to the Tax Code can address income inequality in the U.S. and the political opportunities for reform.” By the end of the 90-minute session, however, the panelists had agreed the Tax Code was not the answer. They agreed that such federal income assistance as child care subsidies, the earned income tax credit, and the like would be more efficient and effective if they were provided as direct subsidies rather than administered through the Tax Code.


The IRS already has too much to do, far more than it is equipped or qualified to do. The Taxpayer Advocate’s Office writes Congress every year describing administrative and other issues with the Tax Code. A recent complaint is that the Mission Statement on the IRS website is no longer true. The Statement says IRS’s goal is to help people understand and comply with their tax obligations. But these days, that constitutes a tiny fraction of its responsibilities. To the thousands of credits and deductions the IRS was already administering, Congress in 2010 added Obamacare subsidies, FATCA (Foreign Account Tax Compliance Act) implementation and additional energy and other credits and deductions. And then in 2013, it returned IRS to its 2009 funding.

The IRS has been responsible for far too much for far too long. Every credit and deduction is an invitation to fraud and abuse. Even criminals locked up for committing other crimes defraud the Federal Treasury. Fraudulent tax refund claims filed by prisoners rose from about 37,000 returns claiming $166 million in 2007 to about 137,000 returns claiming about $1 billion in 2012.

Some financial institutions are described as too big to be allowed to fail. With all that has been added to the Internal Revenue Code, and therefore to the responsibilities of the Internal Revenue Service, it can fairly be said that the IRS has been made too big to succeed. Piling more responsibility onto an already overloaded agency to do things beyond its competence and its purpose is impractical.


It is clear from the reports of the Government Accountability Office, Senator Coburn’s annual Wastebooks, Citizens Against Government Waste’s annual Pig Book, and many other analyses, that when addressing a newly discovered problem, Congress doesn’t even check to see if there already is a government program addressing it. That’s irresponsible. When you read the carefully researched reports of the waste, fraud, and abuse, as well as the fragmentation, overlap, and duplication in the federal government, you will be appalled, if not disgusted and enraged. 

While prisoner tax fraud is shocking, and the rate of fraud in the EITC program is truly breathtaking, they hardly stand alone. A TIGTA (Treasury Inspector General for Tax Administration) audit of 9 years from 2000 to 2010 revealed more than $14 billion paid in refundable ACTC (additional child tax credits) to people in the U.S. illegally, often for children who are not in the U.S. at all. And much of this money was sent out of the U.S. A “refundable credit,” remember, means that the person filing the return claiming the credit need have no tax liability against which to offset it: the Treasury Department just sends a check. These are your hard-earned tax dollars at work: sent to an illegal immigrant who sends them out of the country. For 2013 alone, TIGTA estimates that about 30%, or more than $6 billion, of the refundable ACTC Treasury paid out should not have been.

Continuing to further encumber the Tax Code with provisions that are proven invitations to massive fraud is irresponsible. Government overspending is irresponsible in any event. But current levels of government overspending are irresponsible to the point of criminal negligence. In business, the only reason to incur long-term debt is to acquire productive capital assets. For the U.S. government, the only legitimate reason to go into debt is to respond to and defeat existential threats. But this Administration has plunged our nation and our children and grandchildren deep into debt to pay current expenses. And not just any current expenses, but expenditures relating to activities in which the government has no business being involved, and which are largely squandered through waste, fraud, abuse, fragmentation, overlap, and duplication.

Citizens Against Government Waste (CAGW) produced a television commercial a couple of years ago that needs to be shown again and again. It depicts a vast stadium audience in China exulting as the speaker explains how they came to own the people of the United States of America.


Harriet Frothingham was right. In 1922, she sued Treasury Secretary Mellon for implementing the Maternity Act, which devoted federal tax dollars to the promotion of maternal and infant health. She probably bore no personal ill will towards mothers or infants, but believed the Constitution did not empower Congress to take from some to give to others for this purpose. Sadly, a tragically short-sighted Supreme Court viewed the case, not as a challenge to the government overreaching its Constitutional authority, but merely as a taxpayer complaining about the use of her tax dollars: It declined to entertain the question. This was the beginning of the end of Congress accepting limits on its authority to collect and spend Americans’ earnings.

Modern Congresses have devised a way to avoid even a Harriet Frothingham – type challenge. As noted earlier, the ABA panelists agreed that government programs to alleviate poverty would be more efficient and effective if they were administered as direct subsidies rather than tax deductions and credits. But that would require Congress to appropriate the funds to these programs. By running the payments through the Tax Code, Congress has avoided the scrutiny that would properly accompany any efforts to appropriate funds for these purposes.


Supreme Court decisions ducking the issue notwithstanding, the redistribution of income is not a proper government function, and there is no authority for it in the United States Constitution. This is not to say, of course, that no one is responsible for helping the less fortunate. Far from it. The truth is, we all are. Not through taxes collected under penalty of law, however, but through our personal charitable and community activities

Eileen J. O’Connor practices law in Washington, D.C. and previously served as Assistant Attorney General for the Tax Division of the United States Department of Justice.