Are Big Scandals Too Hard To Fix?

Are Big Scandals Too Hard to Fix?

The news media and the Congress had fun being outraged over some conferences held by the Internal Revenue Service. They had actually spent $17,000 for a painter who painted while giving a talk. They gave away mugs with logos on them. They did things companies do at conferences.

Somehow the very smallness of the dumb things allowed the news media and the Congress to think about them.

Looming behind this tiny molehill of expense is a 20 year series of Inspector General Reports on billions and billions of dollars of fraud and inaccuracy in paying the Earned Income Tax Credit.

After 20 years of both parties in Congress and the Executive Branch failing to solve the problem, the most recent report suggests that in 2012 alone the IRS made improper Earned Income Tax Credit payments between $11.6 billion and $13.6 billion, or 21 to 25 percent of the program’s total payments.

The Daily Finance report on the errors give you a sense of the scale:

“Put in context, the FBI spent just over $8 billion on salaries that year. The Department of Education's budget for grants to primary and secondary education in 2013 is $14.5 billion. In terms of sequestration cuts, the EITC's overpayment exceeds the $9.9 billion that has been cut from Medicare, and is equal to a little less than half of the $28.7 billion that is getting stripped from all discretionary federal spending.”

This incompetent and fraudulent management of the program by the IRS has been going on every year for at least two decades. Projected over the next ten years it is at least $130 billion in improper payments.

Congress has held an occasional hearing, but no one has looked at the non-government models that might actually solve the problem.

This is an example of the need for a "breakout approach" to solving problems.

American Express, Visa and MasterCard manage large amounts of money. They keep losses from fraud and mismanagement in a range from 0.06 to 0.1 percent of their total payments. That is from six one hundredths of a percent to one tenth of a percent loss.

The IRS operates the Earned Income Tax Credit making 21 to 25 percent of its payments improperly.

That means you as a taxpayer have at least $210 lost to fraud and inaccuracy by your government for every dollar lost by Visa or Mastercard, comparing the worst credit card record with the best IRS record. If you compared the best credit card record with the worst IRS record that would be losing approximately $416 worth of taxpayer money for every dollar a credit card company lost.

Congress has known about this loss of money for two decades.

There have been modest efforts to improve the program marginally but nothing has worked. (To show you the difference in expectations between the bureaucracy and the private sector, the law that was intended to clamp down on the improper payments required the IRS to get them below 10 percent -- only 100 times the worst rate of the credit card companies.)

They have failed because the temptation to get the money is greater than the IRS’s concern about protecting the money.

Since a working family could get up to $6,000 in Earned Income Tax Credit (including the additional child payment) there is a substantial incentive to find ways to get the money.

Aggressive incentives for individual creativity almost always beat passive bureaucracies (the problem is huge in Medicare and Medicaid for the same reason and probably in every government payment program).

The technology of cheating has far outstripped the bureaucracy of enforcement.

If the $17,000 painter was worth looking at, you would think $130 billion in fraud over a decade could become a major focus of attention.

Yet neither the Congress nor the news media has the will to look at big things and think through really big changes.

There is a great opportunity in a "breakout theory" of applying the new systems invented by pioneers of the future to transforming government. In the Earned Income Tax Credit alone, that approach might be worth billions.

One final note on speed and intensity.

If Walmart, Costco, Target , or McDonald's were told they had a division losing 21 to 25 percent of its gross revenue to fraud, they would be relentless about making the necessary changes until the problem is fixed.

In the private sector, businesses respond immediately and decisively to losing lots of money.

Since the public sector loses the taxpayers’ money rather than its own, shouldn't we expect the Congress and the President to show the same focus and the same urgency?

Ask your House and Senate members when are they going to end the Earned Income Tax Credit losses.

In future weeks we will have some more big opportunities for breakout thinking that can save billions.

Your Friend,
Newt