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naraburns  nihil supernum  1yr ago (text post)   34548 thread views

Culture War Roundup for the week of January 30, 2023

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New Frontiers in Algorithmic Racism - Tax Edition

The New York Times has an article out on the IRS algorithmically targeting black Americans at higher rates than other racial groups. The claim is that there's something in the algorithm that inappropriately biases it against black Americans. Summarized in the opening paragraphs:

Black taxpayers are at least three times as likely to be audited by the Internal Revenue Service as other taxpayers, even after accounting for the differences in the types of returns each group is most likely to file, a team of economists has concluded in one of the most detailed studies yet on race and the nation’s tax system.

The findings do not suggest bias from individual tax enforcement agents, who do not know the race of the people they are auditing. They also do not suggest any valid reason for the I.R.S. to target Black Americans at such high rates; there is no evidence that group engages in more tax evasion than others.

OK, so what exactly is causing them to get audited more if it's not individual bias, the machines are blinded to the race of the individual, and the rules are the same for everyone? Apparently some of it comes down to targeting EITC filings:

Black Americans are disproportionately concentrated in low-wage jobs. They are more likely than whites to claim the E.I.T.C. The authors wondered if that prevalence in claiming the credit might explain why Black taxpayers face more audits, because I.R.S. data show the agency audits people who claim the E.I.T.C. at higher rates than other taxpayers.

But as the research progressed, the authors found the share of Black Americans claiming the E.I.T.C. only explained a small part of the audit differences. Instead, more than three-quarters of the disparity stems from how much more often Black taxpayers who claim the credit are audited, compared with E.I.T.C. claimants who are not Black.

Unless I'm missing something, the article does not explicitly state what the relevant factors are that result in this targeting are. In what I see as typical NYT style, it does leave a breadcrumb that might be suggestive if you're ignoring the narrative quotes embedded in the article:

Black taxpayers appear to disproportionately file returns with the sort of potential errors that are easy for I.R.S. systems to identify, like underreporting certain income or claiming tax credits that the taxpayer does not qualify for, the authors find.

To me, this reads like the most likely explanation for black taxpayers being audited more frequently is that they report their income incorrectly in easy-to-detect ways. Since the IRS already has W-2 data for filers, it's probably not very hard for them to notice when someone reports their income wrong. There isn't really any elaboration that I find after this, so I'm unclear on how much this accounts for auditing disparities. The implication of the article and the quotes from "equity" advocates imply to me that we should figure out a way to make sure that white Americans are audited at least as much as black Americans, regardless of who is misreporting their income more frequently.

As cynical as it sounds, I'm beginning to hear the term "algorithmic bias" as nothing more than a form of projection - algorithm systems frequently detect something real about the world, people with racially motivated politics don't like that outcome, and they seek to shift the algorithm towards a bias in favor of their preferred group. If a program that is optimized for detecting incorrect tax filings works as intended to detect them, but turns up more black Americans than white Americans, the suggestion appears to be to change the weighting until it evens out the races, regardless of the impact on the efficiency of detecting lost revenue. The "algorithmic bias", from my reading of this would be injecting a deliberate racial preference to counter the program noticing actual disparities. I am reminded of the racial resentment scale, in which people who say that "blacks have gotten less than they deserve" are not racially resentful, while those who think things like "Irish, Italian, and Jewish ethnicities overcame prejudice and worked their way up, Blacks should do the same without any special favors" are racially resentful.

Anyway, I'll be curious to see if the study is released more publicly and details what exactly is causing the disparity.

Yet another reason the FairTax would be fairer. As only businesses would pay taxes, consumer-laborers would be freed from fear of the taxman, and used goods such as thrift store clothes, used cars, and pre-owned houses would be completely tax-free.

If I'm reading this right, the FairTax is a strict 23% tax on goods and services at the point of sale. No brackets, no deductions, just any new sale getting 23% more expensive. Oh, and I guess the "prebate" basic income each month.

Interesting.

How does this interact with taxes-as-an-incentive, e.g. vice tax or tariffs? I understand there are reasons to consider those "unfair," but I'd expect to lose a lot of utility by slicing them out entirely. It sounds like this would be the biggest market-capitalist policy victory since the Gilded Age.

…just any new sale getting 23% more expensive…

That’s the easiest misunderstanding to make, and the easiest to deal with, so I’ll work on it before dealing with your main point.

The FairTax is designed to replace the “embedded” taxes hidden in the prices of market goods. First, think of the income taxes currently embedded in a Big Mac cheeseburger. The cashier and the cooks, the manager, the franchise owner, the owner’s LLC, the food truck company’s drivers, packers, owners, the farmers who grew the food, the business owner’s and manager’s investment firms’ personal and corporate income taxes, etc.

And all of these taxes are built into the existing customer cost of the hamburger. That means, on top of your own income taxes (supplied by your job’s customers), you’re also paying everyone else’s whenever you buy anything. On average, the embedded taxes in American goods and services make up about 25% of the cost. For every dollar you spend, a quarter already goes to Washington D.C. through the IRS.

The bill outlines a transition between the income tax regime and the FairTax regime where, instead of part of the gross receipts of that burger going into everyone’s paychecks only to be immediately yoinked out for withholding, the FairTax portion of 23¢ from each dollar just goes right to Washington. Prices will remain basically as-is. Paper wages will go down but take-home gross remains the same. During the first year of transition, price gouging due to greed or misunderstanding will be heavily watched and penalized. After that, markets should be adjusted to the new reality, but fraud will continue to be watched for by a much smaller tax authority.

How does this interact with taxes-as-an-incentive, e.g. vice tax or tariffs? I understand there are reasons to consider those "unfair," but I'd expect to lose a lot of utility by slicing them out entirely.

You are correct, it removes the incentive structures and turns American taxation into merely a source of government revenue, collected exactly once from each commercial activity, automatically and without loophole or bias.

If governments, federal and local, want to continue behavioral modification of the populace, they’ll have to find other ways. With all the overlapping incentives built into taxes and embedded in pricing, the market is hopelessly distorted and most people simply assume a price is a price and pay it. Keep in mind, nothing in the bill precludes laws increasing regulatory burdens which companies would predictably move into the price.

the "prebate" basic income each month

I do like that you noticed that! It would decouple revenue from labor in an increasingly automated marketplace, and it would institute the infrastructure for additional reforms such as replacing means-tested welfare (filtered through layers of salaried bureaucracy) with direct-deposit flat universal welfare.

Whether you see the FairTax “prebate” as basic income provided by the state, a tax rebate, or an “American dividend” akin to Yang’s proposal, goes back to the philosophical nature of what taxes are, and whether they’re theft or justified. I see the FairTax as a direct tax on economic activity, which income tax was always a proxy for anyway.

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