"Getting Rid of the IRS"--Detroit's Nolan Finley's wrong solution to the wrong problem

I suppose it shouldn’t be surprising that the mostly-to-the-right Detroit newspapers would have a center-page opinion piece calling for the elimination of the IRS, that ages-old mantra of the radical right and of those corporate-backed propaganda tanks and radical-liberatarian idea pushers like Cato and Heritage Foundation and Claremont and many of the Tax Party groups, etc.  But this one is so bad that it is necessary to call it out for what it is–a bunch of hog-wash.  See Nolan FinLey,  Let’s Get Rid of the IRS, Detroit News (June 10, 2013).

Finley starts out with a presupposition that the scandal-mongering about the IRS is not only completely accurate (which it isn’t–liberal and conservative groups were selected for scrutiny, and scrutiny was called for in respect of groups that had “tea party” in their names, since most of them were in fact mainly doing politicking) but that it was also ”obvious[ly]“ done from at the orders of Obama operatives to aid the President’s election chances (which is completely unfounded conspiracy-mongering speculation).  He states that “the IRS has been caught red-handed targeting conservative political groups for special scrutiny in what seems obvious was an attempt to aid the reelection bid of President Obama.”

An initial scaffolding of distortions and malicious speculation cannot bode well for any opinion piece.  So it isn’t a surprise that the rest of the piece doesn’t hold water, either.  He calls the required statutory scrutiny of applicants for 501(c)(4) status a “dragnet”–failing to even acknowledge that the statutory requirement states that such groups must be “exclusively” operated for social welfare purposes and that it is in fact through administrative dispensation via interpretative regulations that the IRS applies instead a “primarily” for social welfare purposes test, thus permitting (too much) politicking as long as it isn’t the primary activity.

He goes on to claim that use of the term “patriot” as a screening filter for politicking groups implies that “the United States government finds something sinister in patriotism”.  Again, that’s a ridiculous association of what may possibily have been a perfectly reasonable though politically unwise filter term–i.e., if there are lots of groups with “patriot” in their names that do a lot of politicking, then it is a reasonable term to pick for giving those groups extra scrutiny to see if they do too much politicking, though the expectation that conservatives would rise up in arms if those types of groups receive extra scrutiny should have been a red flag cautioning against use of that term in spite of its usefulness.

Then Finley asserts that this conspiracy-theory thinking provides “more than enough reason to jettison plans to make it [the IRS] the enforcement arm of Obamacare.”  Now, it is true that the IRS has so many different federal programs that it has to oversee that it is almost impossible for it to do an appropriate task of doing so.  Congress has loaded it with tasks (including all the tax expenditure programs embedded in the federal income tax code) and consistently underfunded it so that it is usually understaffed and overstretched.  But the answer to that is not to take away a task that it is perhaps best suited for out of all the agencies, but rather to fund the IRS appropriately so that it can do the tasks assigned to it by Congress.  Finley completely ignores the underfunding problem, since–as revealed later on–he really wants to decimate or eliminate the IRS entirely.

 Finley talks about the IRS as “an institution America no longer trusts”  because it is “the most feared agent” and on “that has proven itself willing to manipulate the levers of government to achieve a political end.”  Again, many problems in this rhetoric. 

• If the IRS is actually the “most feared” (I personally suspect the CIA and FBI and NSA would come in ahead in that race, but haven’t seen any actual empirical study on this issue)–even after the enactment of three laws pulling back on its power to enforce and essentially hamstringing its employees with the “ten sins” provisions included in the 1998 act (see earlier post)– it is because for decades the right-wing propaganda tanks and media have been pushing distrust of the IRS and of taxes and of government generally.  People are influenced by that constant cry of “bad guy” based on blowing up of individual anecdotes into massive (presumed) patterns.
• And the claim that the IRS “has proven itself” using its power for political purposes is simply unfounded.  There is no “proof” of the assertion made by Finley.  He is merely playing the Bill O’Reilly game of asserting speculation–or even worse, falsehoods,– as fact in order to buttress his own personal vendetta against the IRS and its employees.  Most IRS employees are civil servants, not political appointees.  I’ve known quite a few Republican IRS employees in my years as a tax practitioner, and have considered writing about what I consider a related problem — that  too many IRS employees are too willing to court the pleasure of taxpayers such as big multinationals or large law firms or accounting firms that may well become their future employers or clients when they leave the Service.

 Now Finley hits his stride with his real objective–arguments for disbanding the IRS, eliminating the income tax, and replacing it with a (regressive and hard to enforce) national sales tax.

The most fitting punishment would be to disband the IRS. And junk the income tax, too. Mike Huckabee, former governor of Arkansas and now a TV talk show host, is urging Congress to replace the income tax with a national sales tax. You’d pay tax on the money you spend instead of the money you earn.That would eliminate the need for an IRS that audits tax returns, hands out non-profit status and enforces a tax code that is egregiously complex and unfair. Id. (paragraphing removed).

 Finley reveals his true ignorance here (if he hasn’t done for most readers already).  Let’s just consider first some of the ancillary issues around “disbanding the IRS”.

• Because the IRS does function as the major enforcement agency for many things besides the income tax, Congress would have to undertake a comprehensive analysis of all of those activities and assign them to some other agency.  In all likelihood, that other agency would lack agents with expertise to handle the assigned task, and the result would be essentially a transfer of those currently staffed with the activity to the other agency, requiring considerable time to merge functions and perhaps failing to do it well enough to maintain current operating efficiency, much less improve it (just as huge mergers or consolidations of businesses often go awry). 
• Further, the time to do the study, legislate the transition, and implement the transition would require continued operation of the current agency and the replacement agency, duplicating costs at a time when conservatives like Finley claim they want to cut wasteful government spending.
• The Internal Revenue Code is not really “egregiously complex.”   

1. Read earlier posts on the right’s tendency to overstate (by tens of thousands of pages) the “size” of the Code and to treat “size” as an appropriate substitution for any analysis of complexity. 
2. Only 30% or so of individual taxpayers itemize, and itemization is the primary complexity faced by individual taxpayers.  Most of those who do itemize are in the relatively wealthy part (upper 30% )of the income distribution, and most of those who have difficult and complex decisions to make are the very wealthy who have expensive tax experts to do their work for them.
3. Most of the complexity in the Code stems from two factors–(a) tax expenditures (subsidies) that benefit (substantially, in most cases) particular types of wealthy and business taxpayers lobbied for by those taxpayers and (b) anti-abuse rules necessitated by the clever tax strategies invented by the wealthy taxpayers’ (especially corporate and business taxpayers’) expensive tax experts.
4. It is naive to think that any tax system–whether income or excise or transfer or territorial or worldwide or sales or VAT– could be “simple” for wealthy individual and corporate taxpayers with a global playing field and incredible sums able to be spent on avoidance and at the same time generate sufficient revenues to provide for the most basic of public goods and services, including a decent safety net for those caught in vulnerable positions by age, illness, or other lack of privilege.

5. Most sales tax systems include incredible arrays of exemptions (for example, for non-profit groups and charities) and exclusions (for “necessities” where the sales tax could make a difference between life and death for those living in poverty) and special provisions (lobbied for by particular industries).  A VAT (if that were the form required) would in all likelihood require the same complexities about what is income or not that an income tax requires.  A VAT or a national sales tax would require a mechanism for enforcement of collection not unlike the IRS’s function and a mechanism for tracking individual’s payments not unlike the IRS’s current function.  It would not permit the elimination of audits of tax returns (just different kinds of returns), handing out nonprofit status (just a different rationale and basis) or enforcing a complex tax code (just a different one). 

 Finley’s ignorance is further revealed by his claim that a “similar outcome” (disbanding or making the IRS much smaller) could be achieved by “vastly lowering current income tax rates in exchange for eliminating all deductions and credits” because there would be “no reason to examine returns.”

• lowering rates doesn’t achieve anything but less revenue–which will have to be made up for in other ways (adding complexity) or by further hardship on the already suffering ordinary people of this country who bore the brunt of the Great Recession, the foreclosure crisis, the unemployment crisis, and the corporatisation of education that has paid administrators twice or more what they are worth while cheating professors, teachers and students;
• eliminating all deductions and credits might simplify somewhat the income tax, but at the cost of considerable unfairness in many cases–for just a few obvious examples, removing the foreign tax credit for taxes paid to other countries would result in some instances in “double taxation” of the same revenue by the US and the other country; removing the “standard deduction” and “personal exemption” would undermine a universal view that the income tax shouldn’t reach the amount necessary to maintain a barely sustaining level of income for food, shelter and clothing;
• even if it were possible to “lower rates and eliminate all deductions and credits”, it wouldn’t be possible to get rid of the IRS or eliminate audits or curtail enforcement or reduce the tax code to something a kindergartner could understand–a critical question for the Code is “what is income”–and therein lies a huge portion of the complexity and most of the ways that taxpayers have found to abuse the rules by claiming “phantom” losses.  (Note that Finley doesn’t talk about removing elections, exemptions, and exclusions–was that intentional?)  There would still be the same need for returns, audits, and enforcement, and there would still need to be all the procedural provisions for litigation and regulations and penalties and interest on overdue taxes.  There would be rules still for all the different types of entities (much of the complexity of the Code lies in the rules for permitting partnerships to have considerable flexibility in their allocation of income and losses among the partners).  Certainly Finley wouldn’t suggest that the tax code should get to tax gross income and taxpayers be required to forego claiming any losses!

Finley ends with what he thought was a question requiring an obvious answer of “none”–essentially asking that if we can eliminate the IRS and get rid of the health care “entitlement”, “what’s the downside?”

The answer is not the one he so ignorantly professed to believe.  The downside is huge, and there is little upside.  Finley disregards the growing inequality in this country and the continuing poverty in what is still the richest country in the world.  He doesn’t care, apparently, that his “solution” would create even more problems for the poor, as programs that they depend on administered through the IRS-such as the Earned Income Tax Credit and the standard deduction and personal exemptions–would be eliminated with his proposal.  Further, without a tax collection and enforcement agency, much of the good done by the federal government would wilt on the vine–from the Centers for Disease Control to the NIH and the Smithsonian, from transportation safety to education funding, and even the right’s much beloved military.  We simply can’t and shouldn’t get rid of the IRS–every advanced country in the nation has a bureau that collects and enforces the tax laws.  We could get rid of the particular health care reform enacted as Obamacare, but we shouldn’t –rather, we should continue to improve it, ultimately instituting Medicare for all and removing the rent-seeking profiteers from the picture except for those who have so much money that they can afford to buy luxury health care.

Finley’s proposal amounts to more hot-air from the right about their favorite target–taxes and tax enforcement–that would have regressive results lopsidedly benefiting their favorite beneficiaries–the wealthy and Big Business (owned mostly by the wealthy).  Apparently, people like Finley really want a country where brute market forces allow a few to reap all the benefits and the many to suffer, resulting in a classed society with the few living in relative splendor and the rest living off the dregs.  That would be the result of most of these proposals for turning to a regressive sales tax and shutting down federal tax enforcement, making such proposals a form of class warfare pure and simple.

(if you don’t believe me about “rent-seeking profiteers” in the health care business, read Saturday’s New York Times story about the way Questor–a Big Pharma company–has reaped huge profits by essentially building a monopoly power over an immune-disorder drug called Acthar and now intends to purchase a competitor’s potential threat (selling for tens of thousands less) because  a US startup wanted to make it available cheaply in the United States.  Questor bought Acthar in 2001 when it was selling for just a few hundred dollars a vial.  By 2007 questor had increased the price to almost $1500 a vial.  And in 2007, Questor increased the price in a single jump to $23,000 a vial–yes you read that number correctly.  This is the perfect example of the fact that the right’s beloved “market” doesn’t work if the government doesn’t provide the right framework–in this case, enforcement of anti-trust laws much more stringently than has been done in the last few decades as anti-trust has practically dropped from the national vocabulary.)