Congress, Supreme Court Actions Cause IRS Affair

The country is now dealing with a tax issue that seems to mix the supposedly neutral Internal Revenue Service and partisan politics.

It’s happening because of an IRS rule and a Supreme Court decision that opened the door to secret political donations being made through tax exempt organizations.

Some Republicans want us believe that President Obama either was behind IRS bungling in applying the rule or turned a blind eye to it.

Whatever our political views, we believe that the IRS collects our taxes in a completely neutral manner and keeps out of politics.  And presidents are supposed to keep hands off.

That’s not true, and I should know.  I was on Richard Nixon’s “enemies list.”

The White House told the IRS to investigate people on the list, all of whom were thought to be opposed to Nixon’s re-election in 1972.

At a minimum, we were supposed to be audited, which would take our attention away from the election campaign.

I never heard from the IRS. The Commissioner probably pigeonholed the Nixon directive.   

But I have no doubt that the President had tried to get me.

Nixon was probably not the only president to try to use the IRS against or in favor of others, though these memories have faded

Then, last week the IRS itself confessed, after repeated denials, that it had targeted conservative organizations allied with the Republican Party for special and intensive scrutiny when they applied for tax exempt status.

Non-profit organizations designed to help others benefit from tax exemption under IRS rule 501(c)(3) and avoid the risk of government using taxation to interfere with their activities.

But the organizations under IRS scrutiny that were the object of its controversial screening are a relatively recent creation. Under rule 501(c)(4), they are far from being charities.

Non-profit organizations that educate people on political issues can qualify for that kind of exemption provided they are “primarily engaged” in educational efforts and not in active campaign participation.  They cannot endorse candidates, but can oppose them.

The “primarily engaged” standard requires the IRS to look closely at an organization’s activities to determine if most of them are involved in education or in plain politics.

To do that, the IRS can legitimately ask for information that goes well beyond what it would ask from a social welfare group.

When it opened tax exemption to groups involved in campaigns and lobbying, Congress did not give the IRS strict guidelines, so the tax agency is forced to deal with applications case by case.

A flood of applications for this status came after the U.S. Supreme Court decision in the 2010 Citizens United case.

In that decision, the Court allowed the 501(c)(4) organizations to make contributions to political campaigns and said that these organizations could keep secret the names of those providing the funds.  But the organization could not be “primarily engaged” in doling out political support.

Virtually everybody involved in the political process understood that the IRS rule combined with the Supreme Court case would mainly benefit conservative groups.  Almost immediately, they filed hundreds of applications.

Here is where the IRS made its big mistake.  Seeking an easy way to identify these applications and give them the necessary detailed scrutiny, it flagged certain words like “Tea Party” and “Freedom” in the filings.

This could look like political bias whether or not it was.  When asked, its first reaction was to deny that conservative groups were being targeted.   That smelled of cover-up.

Then the issue became completely politicized.  From being a major bureaucratic error, it became a partisan issue.

Because people want badly to believe that tax administration is neutral and strongly dislike political cover-ups, the issue is fertile ground for the GOP.

Some Republicans immediately linked President Obama to the cover-up, implying the IRS really operates under presidential control. They ignored the fact that the head of the agency when the screening was launched was a Republican appointee.

In response, the Democrats outdid the GOP in denouncing the IRS screening of conservatives.  That way, they could emphasize the agency’s independence from the President.

It appears that no conservative applicants have been turned down, though they have been slowed down.  And nobody has shown that, unlike my “enemies list” experience, the White House ordered the screening procedure.

Public confidence in the IRS is being weakened by the posturing of both parties. 

Even more important, nobody in Washington is seeking repeal of a law allowing a tax-exempt conduit for anonymous political donors.

Eliminate that, and the IRS issue would go away.

Senate still paralyzed by the filibuster

This was the year when the power of the filibuster, the 96-year-old parliamentary maneuver that lets the minority control the Senate, was supposed to be brought under control.

Nevada Sen. Harry Reid, the Democratic Majority Leader, said he had seen the light and could support the changes to the rule that he had previously rejected.

Maine’s brand new independent Sen. Angus King, who promised to support major revisions to the rule if he got to Washington, was in a key position to trade his lining up with the Democrats for improvements proposed by a few of his colleagues.

A simple majority is 51 votes.  There are now 55 Democrats (including two independents) and 45 Republicans in the Senate, so the majority ought to be able to pass legislation.  It didn’t happen.

The filibuster requires that 60 senators agree to end debate on an issue.  Effectively, that has come to mean that almost nothing important can pass the Senate without that supermajority.  

Instead of fixing the problem, the Senate tinkered with it.  In all the votes taken in the Senate through May 10 this year, 60 votes were required 31 percent of the time.  Last year, during the same period, the supermajority was needed 58 percent of the time.

That may look like progress, but the change was a procedural illusion, the result of a minor revision that is far from blocking the ability of the minority to control.

At the beginning of each new Congress, a simple majority is all that’s required to change the filibuster rule.  So why didn’t the Democrats make the change?

They were afraid.  They preferred to allow the GOP to hamstring their president and their majority, because they worried about what would happen if someday they found themselves in the same position as the Republicans.

And what about King, a man who, as a mature and independent politician, might be less concerned about doing the traditional thing, instead being willing to use the platform that his special status gives him?

If he acted truly independently, he would have probably displeased Sen. Reid, who would then have assigned him to minor committees instead the prime spots he got on the Armed Services, Intelligence and Budget Committees. 

On Armed Services, for example, he may be able to support B.I.W. or the Portsmouth shipyard. That may have seemed more important than real reform.

What Reid and King did shows the way Washington works.

But these days, Washington is not producing results.  And the filibuster has a lot to do with that.

We read how a bipartisan bill to require broader background checks for gun purchasers was “defeated” in the Senate.  That supposed loss came despite the support of 54 senators for the bill. But 60 were needed.

People may argue about some provisions of the Constitution, but it is remarkably clear in defining those few instances when more than a simple majority is required in the Senate. The senators have simply amended the Constitution to suit the minority.

Reliance on the supermajority may be less valuable than it seems.

In plugging her new book, former Maine Sen. Olympia Snowe, a Republican, relates how she might have been able to support the Affordable Care Act – Obamacare – if the Democrats had been willing to accommodate some of her concerns.

But the Democrats had 60 senators, enough to pass their bill without compromising. 

Then, two unexpected things happened. The House Democrats narrowly passed another version of the bill that was more complicated and less effective.  And the Senate Democrats lost their 60^th vote when Massachusetts Sen. Ted Kennedy died and was replaced by a Republican.

The only way for the Democrats to pass the final version in the Senate was to accept the House version unchanged.

The result is that Obamacare is under attack from Republicans who can fairly claim that nobody would listen to them when they sought compromise.

How different government would be if the Democrats, without having to do so, had sought compromise with at least some Republicans.  

That’s the way the Senate often worked before the GOP started using the filibuster for almost any major piece of legislation.

If the filibuster were abandoned, any piece of legislation adopted by only one party could easily be repealed after an election that brought the other party to power.  That could mean more effort to pass bipartisan bills in the first place.

In other words, the absence of a filibuster could be more likely to promote durable political compromises than does today’s approach which virtually guarantees unproductive partisanship.

Needed: Small compromises on big budget

Republicans and Democrats have both proposed federal budgets, the first time in years that each has come up a plan.

Both parties call for tax increases and spending cuts.

The difference is mainly about what each would do with the money from the tax increases.  The Republicans would raise some taxes to reduce others.  The Democrats would cut the deficit.

The GOP plan is based on the idea that tax cuts stimulate the economy.  An improved economy produces more tax revenues and, when spending is under control, the new revenues would make it possible to reduce the deficit.

The Democrats have a more direct approach.  Use new tax revenues now, they say, to trim the deficit.

One way or the other, both say they want to reduce the annual federal deficit.  Unfortunately, when it is in power, each party increases the deficit, often by catering to the interests that contributed to its election success.

The picture that emerges shows both parties seem somewhat less serious than they claim to be about cutting the deficit. 

Recently, some Democrats have admitted they favor a permanent annual deficit, provided it’s not too large.  Because some federal spending benefits future generations, they say, it’s all right to pass some of the cost on to them. 

What taxes would the GOP cut?  They complain that at 35 percent, the federal corporate tax rate is among the highest in the world.  They want to reduce it.

The corporate tax rate would be a reasonable target, if only companies actually paid it.

Last year, General Electric, a huge, diversified company, paid 14.4 percent in taxes on its profits.  It can take advantage of tax preferences – more commonly called loopholes – that allow it to exclude income from taxation.

And Fairchild Semiconductor paid no taxes at all.  It can take advantage of having lost money in earlier years, a feature of the tax law that does not apply to most individual taxpayers.

  

A cut in the corporate tax rate would mostly benefit the corporations concerned.

The budget choice is to raise taxes or cut the programs.  In either case, the federal government would continue to run deficits.

Beyond taxes, the main differences between the parties are about cutting spending on Medicare, Medicaid, and Social Security.  Republicans want to reduce these entitlement programs, but Democrats aren’t enthusiastic about such rollbacks.

The elusive “Grand Bargain” would deal with all issues – taxes, entitlements and deficits.  The parties are so far apart, even to the point of allowing the sequester to kick in, that such a deal seems impossible.

One solution is for a party to takes control of the presidency, the House of Representatives and a filibuster-free Senate.  That’s not likely, leaving compromise as the only alternative to more deficits.

Let’s say each side was willing to hold its nose and accept something less than perfect.  Taxes could be increased with some of the money going to deficit reduction and some of it going to tax reform that could result in lower taxes for middle-income people.

The first step on this approach is to close as many of the worst loopholes as the parties can agree upon.  That’s not as impossible as it sounds, because there is already agreement on getting tough on a few tax breaks.

But that step won’t produce enough revenues.  The total amount of loophole benefits that any taxpayer – individual or corporate – can use could be limited to a fixed percentage of gross income.  Taxpayers could still choose their loopholes, but within limits.

In setting a cap on loopholes, Congress would have a good idea how much revenue would be raised.  As the economy changes, the cap could even be adjusted.

That way, Congress could keep on adding loopholes as it inevitably will, knowing the effect would be limited by the cap.

If too much of the income of the wealthy or of companies doing business abroad still escaped taxation, the much-maligned “alternative minimum tax” could be made to do what was originally intended.  It was meant to nullify or limit tax avoidance features used mainly by the wealthy.

In short, all of these measures show that it is possible to increase tax revenues without touching current tax rates.

Some diehard GOP House members won’t accept any compromise.  But electoral reality could push other House Republicans to join with Democrats in finding a compromise. 

Without abandoning their widely opposed positions on taxes and spending, the parties ought to concentrate on finding small steps on which they might both agree.  We’d call that progress.

Tax Reform Deal Jeopardized by Myths, Fear of Change

The obstacles to Maine tax reform illustrate almost perfectly the seeming impossibility of achieving bipartisan political solutions.

People say they want political cooperation to produce positive results, but then refuse to support compromise and insist on keeping their positions.

When it comes to tax reform in Maine, such positions may be based on opinion not supported by fact.

That same attitude is one reason why legislation dealing with the deficit, guns, immigration, or health care, all sorely needed, cannot get past deadlock in Washington.

This year, independent Sen. Richard Woodbury, a highly qualified economist, led a group of Democrats and Republicans to come up with a set of tax reform proposals that are both balanced and sensible.

They demonstrated just the kind of bipartisan cooperation that voters overwhelmingly say they want, but are not getting.

In brief, the proposed tax package does two things.  It would move Maine more into the mainstream of state taxation.  And it would take advantage of changing state characteristics, with emphasis on taxing tourists and catering to the state’s older population.

Maine ranks near the top in income tax rates, and it taxes the income of average people heavily.  If politicians want to do something for middle-class taxpayers, as they frequently say they do, then the best thing they can do is cut tax rates that target them.

Of course, the state would lose a lot of revenue if it cut the income tax.  The only other place to make up the loss is the sales tax, where Maine’s rate is low.  Maine ranks 43^rd out of 50 states.

A sales tax increase is the key to tax reform.  But doing anything about the sales tax means facing the myths surrounding it.

The proposal calls for an increase from five percent to six percent.  And it would put more items under the sales tax than now are covered.

Other states with six percent and more items covered produce no evidence that these factors cut the volume of sales or harm lower income people.

In fact, Maine has had a six percent sales tax without a significant impact on sales.  And its sales tax covers about 25 of the 168 items that other states may include.

Merchants resist tax reform, because they believe that they will lose sales.  They say that going up one percent would hurt them.  It simply stands to reason, they say.

Economic research finds no evidence that a one percent increase in the cost of consumer goods has such an effect.

Would thousands of Maine men trek across the border to New Hampshire, with no sales tax, to get their haircuts just to save about 78 cents – the added cost of the sales tax?

On the other hand, tens of thousands come to Maine to vacation.  They would pay the higher sales tax.  And they would pay a higher lodging tax also set in line with other states’ rates.

The proposals have something for each party.

The Republicans would see the end of the inheritance tax or, as they call it, the “death tax.”  The state would lose relatively little income and could reasonably expect some of its wealthy retirees, who now leave to avoid that tax, to stay home.  And there would be a flat income tax rate of four percent.

The Democrats would get tax breaks for lower-income people to cushion the effect of the change in the sales tax.  And everybody would get a bigger break on property taxes with the homestead exemption going to $50,000.

As the economy changes over time, the tax system needs to change along with it to ensure that the right people are paying.

Those who claim taxes will increase probably fear some of the tax burden will shift from others to them.

For example, in the United States the sale of services has skyrocketed compared with the sale of goods.  But Maine’s sales tax continues to focus mainly on automobiles and building supplies.

Tourism has become the state’s biggest business.

And Maine, which has become the state with the highest median age, drives away the many of the most affluent older people.

The changes in the economy since Maine’s tax rates were adopted suggest that there’s no way to know exactly what will happen to revenues if the bipartisan proposal were put into effect.  But it would be more fair.

In effect, Woodbury and his Republican and Democratic colleagues have called the bluff of those who demand bipartisanship. 

Do we really want compromise – in either Augusta or Washington?