https://www.cato.org/blog/biden-mccarthy-deal-modest-start

Chris Edwards

Congress is considering the Biden‐​McCarthy debt‐​reduction deal. The Fiscal Responsibility Act of 2023 would reduce deficits by $1.5 trillion over the coming decade.

The reduction would be a start at righting the federal government’s fiscal ship, but just a small start.

The $1.5 trillion in savings would take a very modest bite out of the $20 trillion in cumulative deficits and $80 trillion in cumulative spending expected over the coming decade.

Once congress gets this budget battle behind it, it can move on to larger reforms.

https://www.cato.org/blog/high-earners-make-relatively-smaller-tax-errors

Chris Edwards

Senate Finance Committee Chair Ron Wyden (D‑OR) held a hearing last week to counter the House Republican plan to cut the recent IRS enforcement boost. Sen. Wyden said, “If you’re looking for the big winners of the McCarthy IRS defunding plan, it’s billionaires and corporations who cheat on their taxes … Repealing that funding is a $191 billion giveaway to wealthy tax cheats.”

I offered a different view at the hearing. I noted that tax enforcement imposes collateral damage, that the tax gap has been stable for decades, and that the U.S. tax gap appears to be smaller than Europe’s. The “tax gap” means unpaid taxes from errors and cheating.

Here’s one problem with Sen. Wyden’s view: IRS audits find relatively smaller errors and cheating on higher‐​income returns than lower‐​income returns. As shown in the table below, IRS audits recommend additional tax of 5 to 8 percent of income for middle‐​income households, but just 1 to 4 percent of income for high‐​income households. These are averages within income groups over 2017 to 2021.

For example, for households facing additional tax, the average is $6,100 for those earning $75,000 to $100,000, which is 7.0 percent of income, and it is $117,033 for those earning $5 million to $10 million, which is 1.7 percent of income. Note that the average audit change of $117,033 for this high‐​income group may seem large, but that is just 6 percent of the average tax paid by these households. Also note that the large relative audit change in the bottom group mainly stems from errors and cheating on the earned income tax credit.

Why does the IRS find relatively smaller errors and cheating at the top? It may because these households are more likely to hire expert accountants and lawyers who have their reputations on the line. The relatively smaller errors at the top are impressive, given that high‐​income returns often involve complex issues such as business income and capital gains.

Data Notes. The IRS publishes aggregate results of audits in its annual Data Book. My table is based on a Government Accountability Office summary of the IRS data in GAO-22–104960 (p. 34).

The income groups are based on “total positive income” not adjusted gross income (AGI). However, the IRS and GAO do not appear to provide average total positive income within the income groups, so I roughly estimated it using average AGI for 2019 within AGI income groups.

A final note is that these are the additional taxes “recommended” by IRS auditors. But many taxpayers appeal these amounts and get them reduced. Also, some taxpayers challenge IRS audit results in court and many of them win, as discussed here.

https://www.cato.org/blog/collateral-damage-irs-audits

Chris Edwards

The Inflation Reduction Act of 2022 boosted the Internal Revenue Service (IRS) budget over the coming decade by $79 billion, most of which is for increased enforcement. President Biden’s March budget includes the new spending and would more than triple enforcement outlays by 2031. House Republicans have proposed cutting the new IRS funding as part of the debt deal being negotiated.

At a Senate Finance Committee hearing last week, I argued that jacking up enforcement and auditing would cause collateral damage to the private sector. There are better ways to reduce taxpayer errors, including simplifying the code and overhauling IRS operations. Some analysts claim there is vast cheating by the wealthy and corporations, but the official IRS “tax gap” has not increased in decades relative to the size of the economy.

The IRS needs to audit at some level, but there is a balance. Higher audit rates would impose more costs on individuals and businesses in the form of time consumed, legal fees, anguish, and financial uncertainty. Another harm is that “audited firms are more likely to go out of business following the audit,” concluded one statistical study.

Policymakers should recognize that with such a complex tax code, it’s not just taxpayers who make mistakes. The IRS makes mistakes on calculations, sending notices, auditing, and other administrative and enforcement functions. In auditing, the IRS uses algorithms, discrepancies, and other factors to target returns. But the targeting gets more scattershot as audits increase, and so the collateral damage on taxpayers who have done nothing wrong rises rapidly as enforcement increases.

This effect is evident in the Government Accountability Office (GAO) chart below (from p. 13). At all income levels except the lowest, there were more IRS audits closed with no change in past years than today. That is partly or mainly because audit rates used to be higher, and the broader IRS dragnet encircled a larger share of taxpayers who had paid the correct amount. Today’s lower auditing rates may represent a better balance of costs and benefits.

By the way, note that higher‐​income taxpayers have higher “no change” rates from IRS audits. They appear to make fewer errors and cheat less than lower‐​income taxpayers.

A Congressional Budget Office (CBO) analysis of IRS enforcement finds, in parallel, that the marginal benefits to the government of enforcement falls as enforcement rises. The CBO estimated that adding $20 billion to enforcement would yield an additional $61 billion in tax revenues, but then adding a further $20 billion on top would yield just $42 billion in addition. These gains to the government should be considered alongside the costs of enforcement to the private sector and the general displacement of private activities as the government expands.

In sum, policymakers should remember that as audit rates rise, the share of taxpayers hit who are innocent increases, and also that the marginal revenue raised falls. A better way to boost compliance would be to improve IRS computer systems and taxpayer services, as promised in the agency’s strategic plan.

More on the IRS here, here, here, here, here, here, and here.

Data Note: The GAO says of the chart, “IRS officials explained that the no‐​change rate has generally decreased because as IRS does fewer audits, it tends to select returns for audit that have the highest chance of resulting in changes.” Thus, the more auditing, the more time and energies are wasted in auditing returns that are already correct.

https://www.cato.org/blog/fbi-budget

Chris Edwards

The Federal Bureau of Investigation (FBI) is in the news with the release of the Durham report and this week’s testimony in the House about the agency’s politicized leadership. In response to the FBI’s recent failures, many columnists and policymakers have called for either reforms, funding cuts, or agency dismantling.

The FBI has an annual budget of more than $11 billion and a workforce of 37,000 spread across headquarters, 56 field offices, 350 satellite offices, and dozens of foreign offices.

The chart shows that real FBI spending almost doubled from $5.25 billion 2000 to $10.44 billion in 2011 and has since trended slowly upwards reaching $11.4 billion in 2023.

https://www.cato.org/blog/snap-obesity

Chris Edwards

Congress is scheduled to reauthorize the Farm Bill this year, the largest part of which is the $127 billion Supplemental Nutrition Assistance Program (SNAP). The SNAP, or food stamp, program is run by the U.S. Department of Agriculture (USDA). It was created in 1964 to improve nutrition for low‐​income families, but the economic situation and food consumption of such families has greatly changed since then.

Cato’s John Early and colleagues have described how real levels of poverty in America have plunged over the decades. One change has been food consumption. Chart 1 shows that calories have risen substantially for Americans since the 1970s, including low‐​income Americans. The USDA data is the average daily intake for age two and above, and low income means individuals with incomes of less than 186 percent of the poverty level.

Today, many Americans at all income levels are eating too much food, including too much unhealthy food, and they are gaining excess weight. The main food‐​related health problem for low‐​income Americans today is obesity, not hunger.

Chart 2 shows that low‐​income adults and children have higher obesity rates than other Americans. SNAP was originally aimed at alleviating food shortfalls, but many low‐​income individuals today are eating too much of the wrong foods. In the CDC data for the chart, adults are age twenty and over and children are age two to 19. Low income means individuals with incomes of less than 130 percent of the poverty level.

There are many unresolved issues in low‐​income nutrition. Why do SNAP recipients have less healthy diets than others? Which foods cause obesity? Are “food deserts” an important problem? How can people be encouraged to eat better?

Complex nutrition problems likely won’t be solved by one‐​size‐​fits‐​all solutions from Washington. Indeed, federal interventions are often flawed, and because they are imposed nationally can generate widespread harm. The imposition of arguably faulty federal dietary guidelines is an example.

Another example is SNAP, which has also had broad—and perhaps partly negative—effects on diets. The USDA says that the program is supposed to provide “nutrition benefits,” “healthy food,” and “healthy eating patterns.” But about 23 percent of SNAP benefits are for junk food including sugary drinks, desserts, salty snacks, candy, and sugar.

The N in SNAP is for nutrition, but studies have found the opposite. One USDA study found that “lower nutritional quality of household food acquisitions was associated with SNAP participation status.” A recent review by Jerold Mande and Grace Flaherty found, “Children participating in SNAP were more likely to have elevated disease risk and consume more sugar‐​sweetened beverages (SSBs), more high‐​fat dairy, and more processed meats than income‐​eligible nonparticipants.” The USDA has found that SNAP recipients are more obese than similar‐​income nonrecipients.

Because SNAP is a rigid top‐​down program, it has likely displaced alternative, and perhaps better, solutions for low‐​income nutrition. The federal government, for example, has repeatedly denied city and state requests to withdraw SNAP subsidies from soft drinks and candy, as discussed by Nicole Negowetti. The nutrition case against sugary soft drinks is clear‐​cut as Negowetti notes, but they are the single largest purchase item in SNAP. The USDA advises against sugary drinks, but its own SNAP program subsidizes them.

People can buy foods they want with their own money. But when taxpayers are paying $127 billion a year for a program that does not produce the outcomes promised, it is time to reevaluate. Congress should perform a thorough review of SNAP’s nutrition failures as it reconsiders the Farm Bill this year.

I recommend that Congress devolve SNAP funding and administration to the states, allowing for a diversity of policy approaches. Low‐​income nutrition involves many uncertainties, so imposing a single national policy does not make sense. With devolution, states could try different rules for allowable purchases, work requirements, benefit levels, and other program features. That approach would generate information about what works best for recipients, taxpayers, nutrition, and the economy.

More on SNAP, nutrition, and obesity here, here, here, here, and here.

Data Note: Obesity for adults means a BMI of 30 or more. Thus, an average‐​height man of 5’ 9” is obese if he weighs more than 203 pounds. Obesity is a higher weight category than overweight, which is BMI 25 to 30.

https://www.cato.org/blog/nutrition-major-government-fail

Chris Edwards

Americans are getting used to failures by government experts. Government economists have a dismal forecasting record. Government actions and advice during the pandemic were often misguided. And dozens of former government intelligence experts got the Hunter Biden laptop story wrong.

A less recognized but also important failure may be in nutrition. Federal experts appear to have issued faulty advice for decades, even as American obesity exploded from 15 percent in the 1970s to 42 percent today. Federal guidance on nutrition has a large influence on health practice across society. Some researchers argue that Americans have generally responded to the guidance, yet obesity has nonetheless soared.

A clue to shortcomings in federal nutrition guidance comes from calorie data. A new U.S. Department of Agriculture (USDA) study shows that average daily calorie intake increased 21 percent from 1977–78 to 2003-04, and then started trending down. By 2017–18, calories were up 15 percent from the 1970s, but as the study notes, “the rise in obesity rate outpaced the increase in calorie intake.”

In a 2022 article, Professor of Nutrition Dariush Mozaffarian noted that “over the last 20 [years] we are not eating more calories, nor exercising less, but are still becoming more obese.” As average calories have dipped, the obesity rate rose from 31 percent in 2001–2002 to 42 percent today.

How can that be? Obesity is caused not just by the amount we eat but also what we eat. Generally, the government advised us to emphasize carbohydrates and deemphasize protein and fat, as shown in the food pyramid. But some nutritionists are now saying that was backwards. As a libertarian, I don’t want the government telling us what to eat, and our diets may have been better if that had been the case.

Like government experts, private‐​sector experts get things wrong. But the government uses mandates and subsidies to impose its will, and its strong positions often displace other views. In a presentation at Cato, author and science journalist Nina Teicholz discussed the government’s flawed nutrition standards and the harm she believes they caused. She observed, “the level of certainty you need to have for public policy of an entire population ought to be very high,” and federal directives on nutrition fell far short of that level.

The chart shows average daily calorie intakes of Americans, based on the new USDA data. Carbohydrates are up 22 percent since the late 1970s, fat is up 12 percent, and protein is unchanged. It appears that we mainly want to look at carbs to explain the rise in obesity.

Below I excerpt from two studies that sync with Nina Teicholz’s views about the record of faulty government advice on protein, fats, and carbohydrates. I understand that other experts have conflicting views. Nutrition is a complex field and scientists have not figured it all out yet.

However, the costs of bad diets to individuals, the medical system, and society are huge, so we should pay close attention to government interventions. This is particularly true this year because Congress is set to consider another large farm and food subsidy bill, which may adversely influence American diets.

First, an excerpt from a 2015 study by Evan Cohen and colleagues in Nutrition. Note that the latest USDA data show fat calories up somewhat since this study was published.

Americans in general have been following the nutrition advice that the American Heart Association and the US Departments of Agriculture and Health and Human Services have been issuing for more than 40 [years]: Consumption of fats has dropped from 45% to 34% with a corresponding increase in carbohydrate consumption from 39% to 51% of total caloric intake. In addition, from 1971 to 2011, average weight and body mass index have increased dramatically, with the percentage of overweight or obese Americans increasing from 42% in 1971 to 66% in 2011.

… Since 1971, the shift in macronutrient share from fat to carbohydrate is primarily due to an increase in absolute consumption of carbohydrate as opposed to a change in total fat consumption. General adherence to recommendations to reduce fat consumption has coincided with a substantial increase in obesity.

… Since the late 1970s, the US government, following the American Heart Association (AHA) and much of academia, has consistently recommended lowering the dietary percentage of fat and saturated fat, as well as the absolute levels of dietary cholesterol, based on a theoretical link between those food components and higher risk for coronary heart disease. This government guidance suggested that the reduction of dietary fat would be accompanied by a concurrent increase in the dietary share of carbohydrate. Taken together, these recommendations were also considered to be beneficial for the prevention of overweight and obesity, along with diabetes, cancer, and other chronic diseases.

… In 1961, spurred by emerging medical and epidemiologic research, the AHA issued dietary recommendations to ‘reduce the intake of total fat, saturated fat, and cholesterol. In 1977, the US Senate Select Committee on Nutrition and Human Needs issued Dietary Goals for the United States, which recommended that fat consumption be reduced to 30% of energy intake, and that carbohydrate consumption be increased to account for 55% to 60% of energy intake.

Following this report, Dietary Guidelines for Americans, issued by the USDA and the US Department of Health, Education and Welfare (now the Department of Health and Human Services; DHHS) in 1980, recommended a reduction in the consumption of the share of total macronutrients attributable to fat and saturated fat, and a reduction in the absolute consumption of cholesterol. To compensate, the guidelines recommended increasing consumption of carbohydrate as a share of total calories because “carbohydrates contain less than half the number of calories per ounce than fats.”

During the 1980s, the federal government continued to issue reports and recommendations encouraging Americans to limit fat consumption. In 1982, the Committee on Diet, Nutrition, and Cancer of the National Research Council issued Interim Dietary guidelines that recommended fat intake be lowered from 40% to 30% of total calories in the diet, officially endorsing the AHA’s recommendations from 1961 and the Senate committee’s recommendations from 1977. The USDA and DHHS recommendations have remained largely unchanged since 1980. In 1992, the Food Guide Pyramid was released, urging Americans to use fats, oils and sweets “sparingly,” and to consume between 6 and 11 servings of bread, cereal, rice, and pasta.

… There is a strong relationship between the increase in carbohydrate share of total intake and obesity.

… this study demonstrated that general adherence to government dietary recommendations to decrease fat share of total dietary intake has been accompanied by a rapid increase in obesity rates.

Second, an excerpt from a 2022 study by Joyce Lee and colleagues in Frontiers of Nutrition:

[From 1800 to 2019] processed and ultra‐​processed foods increased from 60% of foods. Large increases occurred for sugar, white and whole wheat flour, rice, poultry, eggs, vegetable oils, dairy products, and fresh vegetables. Saturated fats from animal sources declined while polyunsaturated fats from vegetable oils rose. Non‐​communicable diseases (NCDs) rose over the twentieth century in parallel with increased consumption of processed foods, including sugar, refined flour and rice, and vegetable oils. Saturated fats from animal sources were inversely correlated with the prevalence of NCDs.

… Ancel Keys’ Diet‐​Heart Hypothesis posited that the mid‐​nineteenth century heart disease epidemic resulted from “a changing American diet”: increased consumption of fats, especially saturated fatty acids (SFAs), and decreased grain consumption.

… The unprocessed elements of our nineteenth century diet–animal fats, whole fat dairy, fresh vegetables, and fresh fruits—were progressively replaced with more processed elements, including industrial seed oils, HFCS, and ready‐​to‐​eat snacks and meals. The data do not support the widely publicized [Ancel Keys’] “changing American diet” of increasing animal‐​derived SFAs over the first 60 years of the twentieth century.

Rather, polyunsaturated fats and partially hydrogenated fats from vegetable oils progressively replaced lard, butter, and other animal‐​derived fats. Across the twentieth century, rising rates of obesity, diabetes, heart disease, and cancer were associated with stable SFA consumption. Yet, large increases in sugar and refined carbohydrate consumption and more modest increases in total calories make refined carbohydrates and total calories more likely factors than SFA in NCD pathogenesis.

… The increased consumption of red meat and SFAs as the cause of the heart disease epidemic was one foundation for Keys’ Diet‐​Heart Hypothesis, strengthened by authoritative repetition, including McGovern’s Senate Select Committee’s Dietary Goals for America (1977), Science in the Public Interest’s (1978) monograph The Changing American Diet, the New York Times columnist Jane Brody’s (1985) Good Food Book, Surgeon General Koop’s Report on Nutrition and Health (1988), and the World Health Organization’s Diet, Nutrition, and the Prevention of Chronic Diseases (1990). However, neither the USDA nor other data supported this narrative.

… The alleged increase in American SFA consumption in the twentieth century was considered the cause of the dramatic rise of non‐​communicable diseases (NCDs) … [But] our findings suggest that SFAs are unlikely to drive obesity, diabetes, or other NCDs.

… US and international agencies and medical associations strongly supported a low‐​fat/​low‐​SFA, high‐​carbohydrate diet for everyone over age 2 years, and through 2008, advocated sugar as healthy for diabetics and the general population.

… Evidence supports both the roles of energy balance and refined carbohydrates‐​insulin mechanisms in obesity, with their relative roles likely varying based on genetics and other factors.

… our findings suggest that increased sugar and refined carbohydrate consumptions during the twentieth century in America may have played a larger role than total calories or physical activity, although this remains a speculation without accurate data on all variables.

Data Notes: The chart shows average daily calories for all Americans over age two. USDA data on grams were converted to calories using 4 grams per calorie for protein and carbohydrates and 9 grams per calorie for fat. Using this approach, the sum of calories in the chart matches the USDA total for 1977–78 but understates the total for 2017–18 of 2,093 calories. More on nutrition and the farm bill here and here. The Nutrition Coalition explores these issues here.

https://www.cato.org/blog/work-requirements-snap

Chris Edwards

Federal policymakers will soon run into a hard deadline to increase the government’s legal debt limit. President Biden wants a simple debt‐​limit increase with no strings attached, but House Republicans have proposed spending reforms called Limit, Save, Grow to include in a debt‐​limit deal.

One GOP reform would strengthen work requirements for the Supplemental Nutrition Assistance Program (SNAP), also called food stamps. The proposal would affect a small fraction of people on the program and reduce costs only slightly. But restricting hand‐​outs to encourage work makes sense because the economy has millions of job openings, as shown in the chart below.

In 2023, about 42 million people will receive food stamps at a cost of $127 billion. Many recipients are exempt from SNAP work requirements, including children, the elderly, and the disabled. About four‐​fifths of SNAP households include a child, a senior, or a disabled person. The other one‐​fifth consist of adults who generally need to be working, looking for work, or in training to receive ongoing benefits.

There are two sets of work requirements for SNAP recipients. General rules require individuals able to work, age 16–59, and not caring for a child under age 6, to register for work, to accept suitable work, or be in a training program. These rules have numerous exceptions. There are additional rules for able‐​bodied adults without dependents (ABAWDs) age 18–49 to receive benefits for more than three months within any three‐​year period.

The Republican proposal would tighten work requirements by raising the top age for the ABAWD group from 49 to 56. Looking at Table 3.2.a here, 3.5 million SNAP households do not include either children, the elderly, or the disabled, and about 2.5 million are in the ABAWD group. That appears to leave about 1 million households or fewer that may be affected by the GOP proposal. The data is for the October 2019 to February 2020 period.

SNAP’s ABAWD rules had been suspended during the pandemic but come into force again this year. And even then, the American Enterprise Institute’s Kevin Corinth notes that numerous states have federal waivers that void some of the program’s work requirements.

Tightening the SNAP work requirements would generate just a small part of the savings from the Republican plan. But it is important to begin reining in bloated entitlements, and adjusting eligibility to encourage work is a good place to start.

More on SNAP here, here, and here.

https://www.cato.org/blog/bidens-irs-enforcement-budget-skyrocket

Chris Edwards

The Inflation Reduction Act of 2022 ballooned the Internal Revenue Service (IRS) budget, with the bulk of new spending aimed at tougher enforcement. The law boosted IRS spending by $79 billion over coming years, which will double the agency’s budget by 2031 and grow its workforce by tens of thousands.

The IRS has published a Strategic Operating Plan to allocate all the new cash. Of the $79 billion increase, $45.6 billion will go for tougher enforcement, $25.3 billion for operations support, $4.8 billion for business systems (computers), and $3.2 billion for taxpayer services.

The IRS does need better computers and taxpayer services, as Joseph Bishop‐​Henchman discusses in his new Cato study. Anyone calling the IRS for help or wanting to correct an IRS error knows that the agency’s “taxpayer services” are a mess.

However, the huge expansion of enforcement is a mistake. The latest IRS “tax gap” estimate shows that tax cheating is not increasing, but rather has dipped as a percent of GDP. Furthermore, Americans are quite honest on their taxes with about half the rate of cheating as the Europeans. And finally, more enforcement equals less civil liberties.

The chart shows President Biden’s budget projections for the four main parts of IRS administration. Enforcement spending is expected to almost quadruple from $5.2 billion in 2022 to $19.5 billion in 2033. The figures include the IRS base spending plus the added $79 billion. The data are nominal outlays from Table 25–1 here.

The Biden administration projects that spending on taxpayer services, business systems, and operations support will rise for a number of years then peak and start falling. But enforcement is projected to rocket upwards to 2032 before levelling out.

However, the enforcement rocket will likely come down to earth. Republicans are generally against the big increases and will work to reduce them. Even if the 2022 law remains in place, the GOP can work to partly offset enforcement spending by reducing the base budget.

By the way, the IRS Strategic Operating Plan includes some good ideas for aiding the public in filing taxes and interacting with the agency. But these may not be achieved if soaring enforcement spending squeezes out all other priorities.

IRS administrative costs could be vastly reduced if Congress simplified the tax code. But tax reform or not, Bishop‐​Henchman urges the IRS to rethink its biases of enforcement‐​before‐​service and guilty‐​until‐​proven‐​innocent. He proposes 10 specific reforms to start moving the federal tax agency in a citizen‐​friendly direction.

Data Note: The main components of IRS administrative spending are included in the chart. But Table 25–1 has a few hundred million in additional annual spending on central fiscal operations in various line items. Also, these figures do not include the massive costs of IRS spending on refundable tax credits and other subsidies.