The Snyder Cuts: Reforming IRS 1946-1952
How Treasury Secretary Snyder cut waste and banished corruption at IRS, while building state capacity.
In the scandal-plagued Truman administration, the most corrupt agency was the Bureau of Internal Revenue (now IRS). After a series of lurid scandals, involving officials being bribed with luxuries such as fur coats, the Bureau of Internal Revenue’s commissioner was sentenced to five years in prison. More than 150 other bureau officials were fired.
Nor was the public much impressed by the routine work of the bureau: corporate tax investigations were two years in arrears, while income tax refunds took more than twelve months to arrive. This agency, with its 19th century organization and procedure, was obviously not up to the job in postwar America.
Congress was inclined to pile on new procedural controls in response to the corruption. But Truman’s Treasury Secretary, John Snyder, saw that corruption and inefficiency were symptoms of the same problem: bad management. Better management would allow the agency to root out corruption while also modernizing its archaic business methods. To strengthen management, the Bureau needed fewer procedural controls, not more.
If Snyder wanted to convince Congress to go along with this, he needed to demonstrate that trusting the agency could pay off. The Treasury, therefore, needed put its own house in order. It turned to work simplification.
My previous post discussed work simplification: the federal government’s approach to management, which they developed during WWII. Although this approach was invented during the war, the Truman administration was the first to apply it to an entire department. Treasury Secretary John Snyder aimed to straighten out his department through, as a guide to work simplification put it, taking advantage of “the great reservoir of unused practical knowledge” of frontline managers.
Within five years, the Bureau had brought its work up to date and cracked down on corruption. They had been so successful at adopting better management that the once-decrepit Bureau had become a world leader in adopting computers! Congress changed its mind about new procedural controls and instead accepted the administration’s wholesale reorganization proposal, which finished the job of abolishing corruption in the Bureau.
The Growing Pains of Taxation
Before WWII only a small number of people paid income tax. During the war, demands for revenue resulted in a vast expansion of eligible taxpayers, with the number of tax returns rising from 20 million to 80 million, and the amount of money collected rising from $5 billion to $40 billion.
What sort of an organization did the Bureau of Internal Revenue have to confront this task? Most work was managed by 64 regional “collectors” of revenue, who (rather surprisingly) were Congressionally-confirmed appointees. Ever since the creation of the income tax, people who filed income tax made payments to a patronage hire! The original intention during the Civil War was to bolster support by appointing men of regional renown; regardless of if this scheme ever had any merit, it was wholly unsuitable for the 20th century and almost inevitably led to corruption.
The bureau was thus riddled with a long-established system of patronage that made effective management impossible, as the collectors were more loyal to their Congressional sponsors than to their ostensible bosses.
The rest of its organization was not much better. The agency was generally organized according to the tax collected, so that each type of tax – such as income, excise, gift, etc. – had its own field offices and reported separately to the Bureau’s commissioner. Not only was this inefficient for management, but taxpayers had to pay different taxes to different offices, and perhaps had to visit multiple far-flung offices.
These problems had always existed but were exacerbated by the war. And the war brought more problems than just an expanded workload: the Bureau lost most of its trained workforce to the war effort, with e.g. accountants being drafted into the military or hired by war plants. With this reduced manpower, paying taxes was essentially voluntary – the Bureau couldn’t investigate more than a tiny fraction of returns, and in fact couldn’t even process returns on time. Nor could they investigate charges of corruption against their (frequently unqualified) workforce.
By the end of the war, work was hopelessly in arrears while corruption was an increasingly open secret. John Snyder – Truman’s Treasury Secretary – was determined to set things right.
Incremental Improvements
When Snyder took office in 1946, he saw managerial reform as key to fixing both corruption and inefficiency. Convoluted procedure prevented good employees from accomplishing anything, while also shielding corrupt officials behind the process’s obscurity. He immediately began studying ways to improve the Bureau of Internal Revenue’s management.
He gathered the top officials and tasked them with improving the Bureau. More than that, he wanted to involve the rank-and-file immediately, stating:
In addition, two other important programs were put into operation in 1947: One was a work simplification program designed to take advantage of the operational know-how of the lower level Bureau employees. The other was a cash awards program in which we rewarded employees who made time and effort-saving suggestions. By the end of 1951, five years after the programs were initiated, more than two thousand cash awards had been made, and about twenty-two hundred work simplification program suggestions had been put into effect.
The department made $38,000 available as rewards for good suggestions. Or after adjusting for inflation, $500,000 – far from petty cash! But the key initiative was a Work Simplification program: front-line managers were trained to trace their office procedure from beginning to end, making simplifications at every point (as my previous post describes in detail).
The Treasury’s Work Simplification initiative began in 1947, with a pilot project in St. Pauls, Minnesota. Treasury got feedback on its training, and gradually expanded the program throughout the Bureau and eventually the entire Treasury department. Through the feedback of low-level managers, the Bureau of Internal Revenue made thousands of improvements to streamline procedure.
Most were minor improvements for handling internal office paperwork. Some were straightforward, yet highly visible to taxpayers: the Bureau combined related forms such as Social Security payments and income tax withholding. It began tracking income tax refunds, to bring the wait down (from more than a year) to a month. And some of these improvements were daring: in 1948, for example, a Cleveland office became the first office to experiment with punch-card equipment.
This is not to say that the political leadership was simply deferring to the wishes of career civil servants. Snyder knew from the beginning what he wanted to accomplish. But he saw the merits of beginning with narrow goals and winning fast, achievable victories:
None of the reforms so instituted were designed as cure-alls. None tried to create a tax man's utopia. They were day-to-day, realistic improvements that could be carried out within the Bureau without congressional approval, and without upsetting revenue collections, and they were carried out within budgets approved by the Congress.
After the system of Work Simplification with cash rewards was well underway, the Bureau employed a consulting agency to study the Bureau’s management. Snyder felt that doing things in this order was crucial: External consultants should be employed, but only after interest in reform had been stirred up among the rank-and-file. The consultants should provide cover to enact more radical reform, but they shouldn’t be a wholly external force that harassed the career employees.
Crisis and Radical Improvements
These consultants were hired in late 1948 and issued their report in 1949, mainly suggesting ways to adopt then-modern technology and to further streamline office procedures. But after this inoffensive report, the Bureau soon received a far more bitter and searching investigation at the hands of Congress.
In 1950 and 1951, Congressional oversight uncovered the depth of corruption at the Bureau, resulting in charges being filed against several officials and many more being fired. Snyder himself was certainly not blameless: he had been very slow in firing political appointees with credible accusations against them.
Crucially, however, Snyder could accurately say that he had already recognized the problem and had been reforming the Bureau for several years. More than that, he could point out that worst corruption was caused by Congress, who created (and benefited from) the Bureau’s patronage appointments. This was, in Congress’ view, an uncomfortably good point.
Because Snyder had already achieved significant successes, he was able to channel the Congressional outrage in a productive direction, later stating:
The investigations that followed had a paradoxical effect. They were to prove in the long run a political liability to the Truman administration, but they were also to make more readily acceptable the wholesale reorganization of the Internal Revenue Service which I so greatly desired. I was convinced that without the investigation, there would have been violent opposition and small chance of approval in Congress of any plans to abolish political appointments in the Bureau. The investigations undoubtedly made many Congressmen reluctant to oppose the reorganization.
In 1952, Truman proposed Reorganization Plan Number 1, which abolished the patronage position of revenue “collector” and reorganized the Bureau generally. Congress accepted this reorganization plan1, allowing the Bureau to implement the far-reaching plan for reform that they had developed (described below).
A Scheme for Reform
As the Congressional investigations began in 1950, the Bureau continued its plans for reform. The consultants had submitted their evaluation to the Bureau, which had to decide what to do with it. They decided that the consultant’s report would be – another crucial point – purely advisory. It was taken only as a document for discussion, with the Treasury department being free to accept or reject any particular point. Eventually they hashed out the following plan for reorganization:
First, under the new plan they created a long-overdue inspection service and began systematically training field officials. They also, as stated, abolished the patronage appointments. This dealt with the immediate scandal and went a long way toward ending corruption. But to enable better management generally, they fundamentally reworked the Bureau’s organization.
Previously, each type of tax had its own set of field offices. Under the new plan, they grouped everything by function2: all appeals were handled by one division, all enforcement by another, and all field offices were consolidated so that taxpayers only had to deal with one regional office.
However, the alcohol and tobacco taxes were exempted from this general rule, as their purpose was more akin to suppressing vice rather than collecting revenue per se. Agency officials noted3 that their intent in reorganization was “Not to make a fetish of rigid consistency in the face of inconsistent circumstances.”
After long discussion, they felt that their plan was ready for adoption. The Congressional investigations gave them their chance, and this was the plan that Truman enacted in 1952.
Implementation
They Bureau had already begun implementing what (relatively little) reorganization it could accomplish without statutory changes. The Congressional investigation gave them the chance to propose the necessary statutory changes, which was accomplished via Reorganization Plan No. 1 of 1952.
The leadership felt, however, that changing the statute was only the beginning. Congress had abolished patronage, but Congress might bring it back. If the leadership wanted this crackdown on corruption to stick, they needed to prove that the reorganization was successful. That is to say, they still needed to deal with the problem of implementation.
To prepare, agency leadership formed small committees, who in turn prepared instructions on transitioning to the new system. They prepared a playbook covering everything from new methods of accounting, to new personnel practices, to disposing of old and outdated forms.
Even with these elaborate preparations, agency leadership decided to implement their reforms in phases. First, they decided to try a pilot program at a single (notoriously corrupt) field office in Chicago. The most senior Treasury officials, including the Secretary himself, addressed the Chicago office on the day of the transition and promised close support for several weeks.
As leadership learned what worked and what didn’t, they updated their plans and their written instructions accordingly. They also discovered the need for things such as legal documents conferring authority on the new officials. These were accordingly added to the implementation guides so that future transitions would go more smoothly.
The Bureau scaled this process up to include more field offices throughout 1952. As their transition plans became better tested, their playbook was refined; eventually, transitioning offices barely needed any support besides these written guides. After leadership felt they had a handle on the problem of reorganization, they reorganized the Washington headquarters itself.
In addition to reshuffling the org chart, earlier experiments with technology became mature enough that reformers could take advantage of them. The Cleveland office had pioneered the use of punch-card machines; this trial was scaled up to include more offices and more forms. Similarly, photocopiers and mimeographs were rapidly adopted across the Bureau, while microfilm was used to save4 “literally acres of storage space”. They even began adopting the primitive computers that existed in the early 1950s.
In 1945, the Bureau’s procedure had barely changed since its founding5 in the Civil War. By the 1952 reorganization, the Bureau was a world leader in the adoption of computers.
This reorganization happened in the waning days of the Truman administration. The outgoing administration looked with pride on its accomplishments, but had a sober view of the remaining difficulty, stating6 “The work of reorganization will not be completed even after all of the new districts have been established, however, for the task of implementation in each district still will be continuing.”
What Snyder Can Teach Us
What can we learn from all of this? First, some lessons about policy implementation.
Snyder had very ambitious goals from day one: adopting modern business methods and banishing corruption. He saw these as two sides of the same issue, that of improving management. The Bureau’s unwieldy organization, with its overelaborate and illogical procedures, resulted in delays while also shielding corrupt officials from accountability. By contrast, clear organization and streamlined procedure would result in fast service with effective oversight. His ultimate goal was to abolish the Congressional patronage in the Bureau that gave rise to so many of these problems.
But he chose to start with the simplest goals, rather than with grand schemes of reform. He built up enthusiasm among line managers through having them win fast victories by improving existing processes. This laid a foundation of success that won him the confidence needed to carry out larger reforms.
The Bureau’s success with these larger reforms was based on a tight feedback loop between their planners and their implementing teams. Leaders followed the first implementations very closely until they felt confident that their playbook could scale. At every point they solicited feedback, so that each new implementation was more successful than the last. They saw that formulating policy was inseparable from implementing it: their reforms had to publicly succeed in order for them to last.
And thanks to their efforts, their reforms did last. Congress has never restored patronage at the IRS; more than that, nobody has even seriously proposed it. While IRS has had scandals since the 1940s, it has never had that particular sort of corruption again, which is as much success as one can reasonably ask for.
Second, some reasons for optimism.
Truman, Snyder, and the 81st Congress were by no means perfect reformers, the sort whose equals we will never encounter today. Truman and Snyder were both far too trusting of corrupt friends, while Congress was mainly focused on scoring cheap political points in response to bad headlines. Yet with the right approach they managed to do the right thing.
It also shows how quickly an agency can move from stagnation to the frontier of technology. The Bureau had modernized almost nothing since its creation, and then adopted the best of IT over the course of five years. The IRS today is attempting to update its ancient codebase; it could do much worse than to learn from Snyder.
Replacing COBOL is, of course, not quite the same as adopting mimeographs. But the principles of incremental, agile improvement are always and everywhere the same.
Appendix: Sources
Two Treasury officials wrote contemporaneous articles explaining how these reforms were accomplished: Treasury Secretary Snyder himself, and Assistant Secretary Parsons. Facts about the reorganization’s timeline or about specific actions are drawn from them. I cite quotations.
Sources:
Snyder, John W. “The Reorganization of the Bureau of Internal Revenue.” Public Administration Review 12, no. 4 (1952): 221. https://doi.org/10.2307/972486.
Parsons, William W. “Installing Management Improvement in the United States Treasury Department.” Public Administration Review 10, no. 3 (1950): 176. https://doi.org/10.2307/972813.
Snyder much later gave interviews that covered the reforms. Assertions about Snyder’s motivation, thinking, or purpose are generally drawn from them. (But with caution, since he was minimizing his personal responsibility for the scandal.) I cite quotations via links.
Source:
“Jerry N. Hess, ‘John W. Snyder’, Harry S Truman Library”.
The relevant interviews are 21 through 23.
As this is only a blog, I have exercised my right to streamline procedure in providing citations.
This plan was enacted under the Reorganization Act of 1949, which allowed presidential proposals to take effect unless either house of Congress objected.
I wrote a previous piece attacking functional reorganization. In fairness, it makes sense on rare occasions, and this was one of them. The field offices did nothing except paperwork, so combining the field offices and grouping the bureau by function was a sensible reform. As the Treasury official so wisely points out, we must not “make a fetish of rigid consistency in the face of inconsistent circumstances.”
Snyder, John W. “The Reorganization of the Bureau of Internal Revenue.” Public Administration Review 12, no. 4 (1952): 225. https://doi.org/10.2307/972486.
Snyder, John W. “The Reorganization of the Bureau of Internal Revenue.” Public Administration Review 12, no. 4 (1952): 222. https://doi.org/10.2307/972486.
Its existence was not continuous. The Bureau was founded in the Civil War but abolished soon after. It was recreated during WWI with basically the same structure. Incidentally, the Bureau of Internal Revenue was renamed to IRS immediately after the reorganization described in this piece.
Snyder, John W. “The Reorganization of the Bureau of Internal Revenue.” Public Administration Review 12, no. 4 (1952): 226. https://doi.org/10.2307/972486.