Politicizing The IRS

Ask Americans which federal agency they fear the most, and many are likely to say it’s the Internal Revenue Service. Every year, Americans send in their federal tax filings by the April 15 deadline — which is only four days away, folks — and we’ve all heard stories about tax liabilities, painful audits, and the IRS taking people’s houses on those urgent tax-preparer and tax-problem-solver radio and late-night TV commercials.

That backdrop of angst is what makes the current issues about a politicized IRS so troubling. On Wednesday, the Office of Special Counsel, which is responsible for investigating allegations that federal employees violated federal law that bars them from engaging in partisan campaign activities, announced that it had found improper political activity by IRS employees. The activities included official telephone calls with taxpayers in which IRS employees explicitly promoted President Obama’s reelection and criticized Republicans.

Also on Wednesday, a House Committee investigating allegations that the IRS targeted conservative groups seeking tax-exempt status for special scrutiny released emails showing that former IRS official Lois Lerner mentioned the possibility of getting a job with Organizing for Action, an offshoot of President Obama’s reelection campaign. Lerner’s email statement may have been an ill-advised joke, but we can’t know for sure because she has invoked the Fifth Amendment and refused to testify about her activities beyond making a general statement that she has done nothing wrong. Another unanswered allegation is that the IRS leaked a conservative group’s application for tax-exempt status to an investigative website. The IRS targeting allegations have caused the House Ways and Means Committee to recommend that the Justice Department prosecute Lerner, and Lerner’s refusal to answer questions has caused the House Oversight and Government Reform Committee to vote to hold Lerner in contempt of Congress. The actions of the two House Committees, it should be added, were taken on straight party-line votes — which only adds to the partisan odor.

Has the IRS become politicized? That’s an important question for everyone, regardless of their political inclinations. Through their tax filings, Americans provide the IRS with huge amounts of otherwise highly confidential information each year — about what they own, what they’ve earned, the charities they help fund, and the causes and candidates they support. Americans need to be able to trust that that information will be kept private and won’t be used for political purposes or to single out people or groups for adverse treatment. The disclosures about political activities by IRS officials and line employees, and the fact that Republicans and Democrats can’t agree about how to investigate the targeting allegations, are bound to erode that essential trust. Whether you are a Democrat or a Republican, if you are a taxpayer that is a very unsettling development.

A Widening Scandal, And Some Valuable Lessons

The IRS scandal may have been knocked off the front page by Edward Snowden’s fugitive travels and the George Zimmerman-Trayvon Martin trial, but it’s still out there, and there have been some interesting recent developments.

The House Ways and Means Committee investigation of the IRS targeting of certain groups seeking tax-exempt status has borne fruit.  The AP is reporting that, according to documents obtained by the Committee, the IRS targeting lasted longer than was originally reported and was broader in scope, with the IRS looking not just at “tea party” and “patriot”-named groups, but also at groups that used terms like “progressive,” “medical marijuana,” and “Israel.”  The documents indicate that the prior report of the Treasury Department inspector general may have barely scratched the surface of what IRS functionaries were doing.

DSC04187The new acting commissioner of the IRS, Danny Werfel, has concluded that the IRS used “inappropriate criteria” on certain screening lists and states that he ended the process earlier this month.  He said he found no evidence of “intentional wrongdoing” by IRS employees, but rather “insufficient action” by managers to prevent and disclose the problems.  Werfel says the IRS is committed to correcting its mistakes and holding individuals accountable as appropriate, and the AP report states that the top five people in the IRS responsible for the tax-exempt status of organizations have been removed from their jobs.

It’s all predictable, and the scenario is a familiar one.  Improper action by an agency comes to light, and the first response is to argue that the practices have ended and there is nothing left to examine.  Sometimes that approach works, but when it doesn’t, and congressional committees begin digging, different stories often emerge, and new questions get asked.  How did the IRS screening lists get created?  Who vetted the terms included on the list?  What process was followed when an organization whose name included such terms was identified?

The IRS scandal shows the value of congressional committees that actually conduct investigations, use their subpoena power, and take meaningful testimony.  It also shows that we shouldn’t necessarily trust the reassuring initial statements of agency heads or accept inspector general reports as the last word.  The congressional committees should continue their investigations, but then they need to take the next step — determining whether the tax-exempt status laws should be changed, and if so, how.  That will require Congress to wrestle with some uncomfortable questions:  Why do we grant tax-exempt status to these organizations — regardless of their political affiliations or apparent interests — in the first place, and should that practice continue?  If so, how do we rein in the exercise of discretion by the IRS, so that bureaucrats can’t simply decide to target one group over another on the basis of whim and caprice?

There’s still a long way to go on this one.

Sailing Through The Loopholes In The Corporate Tax Code

The New York Times recently carried an interesting article on the odd state of corporate tax payments in the United States.  The Times asked a research firm to analyze the tax payments of Fortune 500 companies over a five-year period, and the analysis showed significant discrepancies in the tax payments made by those companies.  Although the stated corporate tax rate is 35 percent, the study found that one company — Carnival Corporation, of cruise line fame — paid total taxes equal to only 1.1 percent of its cumulative profit.  A total of 115 of the Fortune 500 companies paid taxes of less than 20 percent.

The reason for the discrepancy is that loopholes in the tax code allow companies to deduct losses or shield income from taxation by engaging in certain kinds of activities.  As a result, the tax code establishes perverse incentives to engage in such activities — activities which, incidentally, may not be most conducive to being competitive in a global economy or creating jobs in the United States.

The loophole-ridden tax code is why the House Ways and Means Committee is one of the most powerful committees in Washington, D.C., and why the chairs of that committee don’t have any trouble raising money for their reelection campaigns.  The curious tax code provisions that have produced the discrepancies noted in the Times article are like footprints in the snow.  They show that legions of lobbyists have worked with committee staffers and members to insert special provisions that benefit certain companies that engage in certain activities.  Who knows what the staffers and members have received in return?

As the Times article observes, the current situation is the worst of all worlds.  The United States has one of the highest stated corporate tax rates in the world, which clearly must discourage corporate activity and job growth in the United States, yet the actual tax code itself is the product of an insiders’ game, riddled with loopholes that encourage unproductive corporate activity.  President Obama and the Republicans in Congress say that they want to revisit the corporate tax code, reduce the tax rate, and also reduce the loopholes that have produced such a wide divergence in how companies are treated.  Let’s hope they intend to follow through on those statements.  If the United States is serious about addressing its budget deficit problem, both sides of the balance sheet — revenues and spending — must be addressed.