WE DON’T NEED MORE TAX REFORM

Tinkering with the Code Can’t Fix this Problem

by Daniel J. Pilla

As the current IRS scandal continues to unfold, cries are rising from quarters throughout Washington for “reforming the IRS.” I have said many times that tax reform cannot solve the problem of IRS abuse. The system is built on an unsound foundation. And when the foundation of a structure is not sound, the only solution is to bulldoze it and start over again. Tinkering around the edges does not fix the problem. If a house is built on an unsound foundation, it makes no difference how many times you fill the nail holes and paint the walls. You don’t fix the problem.

My first experience with “tax reform” in connection with IRS abuse came in the form of my study of the so-called “Church hearings” that occurred in the mid 1970s. Frank Church was a U.S. Senator from Idaho. Senator Church chaired the Senate Select Committee to Study Governmental Operations with Respect to Intelligence Activities. The committee looked into the actions of government agencies in conducting intelligence gathering activities against American citizens. The activities came to light largely as a result of President Nixon’s Watergate scandal.

The Church committee investigation focused on a number of government agencies, including the IRS’s activities of targeting political groups for heightened scrutiny. It came to light that a branch of the IRS, then called (and long-since defunct) the Special Service Staff (SSS) had the task of investigating political activists. During the committee hearing on October 2, 1975, Senator Church observed, “One wonders how an agency designed to collect revenue got into the business of defining and investigating political protesters.” 

There were some 8,000 individuals and 3,000 organizations on the SSS list. To express the “incredible over breadth” of the target list, Senator Church named some of those targeted. They included:

• The American Library Association
• The American Civil Liberties Union
• The NAACP
• The National Urban League
• The Ford Foundation
• The Conservative Book Club
• The University of North Carolina

Church pointed out that these and the many other groups and individuals on the SSS list, “in essence, were to be punished by the IRS for their political views.” In light of this, Church stated:

We must not allow any agency of this Government to insure its existence or prestige by amassing files on citizens solely for the purpose of being in a position to represent that it has spied on the right as thoroughly as it has scrutinized the left, that it is as vigilant with nonprofit corporations as it is with gangsters. The invasions resulting from such actions far outweigh any need for assurances of IRS objectivity and only open wider the door that would make IRS an unwitting tool for those who would make improper or illegal use of such information.

Former Vice President (at the time a Senator from Minnesota) Walter Mondale, then a member of the Church Committee, observed that “the failure to have proper controls on [taxpayers’ information] could, if unrestricted, destroy this country’s freedom.” The committee’s general conclusion was the IRS’s actions were “outrageous and totally indefensible and exceedingly dangerous practices that threaten America’s freedom.”

Condemnations and admonitions were issued. Privacy and confidentially laws were tightened up. New laws were passed. The problem was fixed – so we were told.

In 1987, then Senator David Pryor of Arkansas introduced legislation in the Senate called the Taxpayers’ Bill of Rights Act. I debated the merits of this bill on radio throughout 1987 and 1988. The bill was intended to eliminate all the recently uncovered acts of IRS abuse that were being carried out by agents throughout the nation.

Again, there was much hand wringing and predictions of dire consequences if the bill was not passed and promises of a new era of taxpayers’ protections if it did pass. We were assured that taxpayers would never have to fear the IRS again. In fact, Senator Pryor claimed that the reason I opposed his bill (which I did) was because it would put me out of business. The bill eventually passed both the House and the Senate in September 1988 and was signed into law by President Reagan. It was the last official act he performed as President of the United States.

I was against the legislation but not because I wasn’t in favor of taxpayers’ rights and certainly not because it would have put me out of business. I’ve done more to foster and protect taxpayers’ rights than any other single person in America and clearly, it did not put me out of business.

Rather, as I stated in the November 1988 issue of my newsletter Pilla Talks Taxes, I was against the legislation “because I did not believe, and still don’t, that the Bill provides the kind of taxpayer relief from IRS abuses which the citizens of this country so desperately need.” Pilla Talks Taxes, November 1988, page 3.

I was right. The Taxpayers’ Bill of Rights Act did not solve the problem of IRS abuse. What it did was move the question of IRS abuse to the back burner so that issue no longer commanded the attention of America.

The early 1990s marked a period of time when by all accounts, the IRS was out of control. Between 1990 and 1996, I did literally thousands of radio shows across the nation and talked with countless Americans who were run over by the IRS. In October 1993, my book How to Fire the IRS was released, presenting the first comprehensive plan to abolish the IRS, the idea for the replacement tax system I believe was (and is) needed, and the model legislation to get is passed.

With this book, I started the national debate on whether the IRS and the income tax should be abolished in favor of some alternative system. As key evidence to support my argument, I pointed to the many abuses that millions of citizens suffered at the hands of the IRS. For example, see my article in Reason Magazine, “Flat Tax vs. Sales Tax: A Debate on Radical Reform,” July 1995. 

In April 1995, the Cato Institute published my policy analysis entitled, “Why you Can’t Trust the IRS.” See: Cato Policy Analysis No. 222, April 15, 1995. This report, published by one of the most influential public policy research organizations in the nation, rocked Washington. Both Steve Moore, then Cato’s director of fiscal policy studies (now a Wall Street Journal economist), and I talked about this report and the problems with the IRS on radio and TV across the nation. Steve actually appeared on national public television along with then IRS Commissioner Margaret Richardson, who did her best to defend the IRS against the overwhelming evidence of abuse I amassed and presented in my report. Steve ate her lunch.

On the heels of that report, Rep. Bill Archer of Texas, then the Chairman of the powerful House Ways and Means Committee announced that he would hold hearings on “Replacing the Federal Income Tax.” Chairman Archer declared publicly that his goal was to “tear the income tax out by the roots.” The hearings were held in June 1995. My testimony to the committee focused on IRS abuse.

The brush fire of tax reform that was sparked by my book in 1993 was now a forest fire raging out of control. Former Texas Congressman Dick Armey and Louisiana Congressman Billy Tozan joined the fight for radical tax reform and we staged debates in Washington and across the nation on the issue of what kind of alternative tax system would best replace the graduated income tax and eliminate IRS abuse. By early 1996, the question was not whether we needed a new system, but rather, what kind of system would raise the needed revenue in the most efficient manner and at the same time, provide the best protections for citizens.

Congress responded with more legislation to “fix the problem.” The Taxpayers Bill of Rights Act II was passed by Congress and signed into law by President Bill Clinton on July 30, 1996. That law contained several provisions intended to create even more protections for taxpayers in complying with the tax code and dealing with the IRS. In fact, the bill did little to change the culture and practices of the IRS.

As the debate heated up, so did the attention that was given to IRS abuses. In November 1996, my book, IRS, Taxes and the Beast was released. That book documented first hand how the IRS systematically used tactics of bluff and intimidation, misinformation and disinformation, and in many cases simply outright lied to taxpayers concerning the agency’s powers and taxpayers’ rights. The book was talked about in the media everywhere.

The tax theologians in Washington started to panic. Clearly, the issue had to be controlled. President Clinton clearly saw the threat and got out in front of the issue. He made the idea of “tax reform” his own and in doing so, dictated the terms of the debate. Clinton created the National Commission on Restructuring the Internal Revenue Service, which began holding its hearings in late 1996. I was a consultant to the commission and provided substantial input on the development of important taxpayers’ protections.

The mandate for the commission, among other things, was to present findings to Congress on ways to change “the culture of the IRS to make the organization more efficient, productive and customer-oriented.” Said another way, to somehow limit IRS abuses. See: A Vision for a New IRS, Report of the National Commission on Restructuring the IRS, June 25, 1997.

And in a move that was directly connected with the revelations in my book, IRS Taxes and the Beast, on September 11, 1997, the late Senator William Roth of Delaware announced that he would conduct three days of hearings to take place before his Senate Finance Committee later that month.

The hearings were historic. I wrote about them in my November 1997 newsletter and in the December 1997 issue, I published my entire testimony to the Senate Finance Committee. In that testimony I documented thirteen specific ways that the IRS fundamentally abused the rights of taxpayers. See: “IRS in the Hot Seat: Testimony of Daniel J. Pilla to Senate Finance Committee,” Pilla Talks Taxes, December 1997.

As a result of these hearings, the pressure that was on Congress to fundamentally reform the IRS was unprecedented. In fact, on June 17, 1998, Congress passed a bill co-sponsored by 153 House members, known as the Tax Code Termination Act. The bill called for the elimination of the income tax by December 31, 2002. While it had no teeth, it was a symbolic attempt to keep “the tax reform debate moving,” as explained by the Bill’s chief sponsor, Rep. Bill Paxon of New York.

One month later, July 22, 1998, as a result of recommendations from the National Commission on Restructuring the IRS, Congress passed the IRS Restructuring and Reform Act. At the time, I viewed this as a monumental achievement in the protection of taxpayers against the IRS. We had new protections in the law that had real teeth and meaningful ways to redress abuses by the IRS. What could be better?

What I did not realize at the time was that the Restructuring Commission and the IRS Restructuring Act was the fire department that the Clinton Administration called in to douse the raging forest fire of tax reform. Clinton totally outflanked the tax reform movement by creating the Commission and eventually the restructuring legislation, which he proudly signed.

Because of that move, the question of IRS abuse as a key political issue driving tax reform was dead. And with it, the question of tax reform also died. And I don’t mean they died a slow, lingering death. The two issues were simultaneously whipped off the table with the stroke of Clinton’s pen on July 22, 1998. There has been no meaningful tax reform debate in America since that very day. Any discussion of fundamental tax reform from that day forward was met with the claim, “the IRS is no longer an issue. We fixed that with the Restructuring Act.”

And yet, Congress continues to make tax compliance even more difficult. As I document in my treatise, 10 Principles of Federal Tax Policy (Heartland Institute, 2010), between 2000 and 2008, there have more than 3,250 tax law changes and people are more at the mercy of the IRS now than ever before.

Now we have a new scandal. Or more accurately, we have new evidence of the kind of practices that have been going on within the IRS probably since day one. No reform legislation, including the landmark Restructuring and Reform Act, has fixed the problem. The reason is that no legislation can fix the problem. If this brief historical analysis of IRS reform proves anything, it’s that even the best intended legislation and well meaning representatives and senators cannot reform an agency that simply has too much power and discretion.

My greatest fear with the current scandal is that we will have yet another round of “taxpayers’ rights legislation” that politicians will guarantee us will fix the problem when in fact, it will not. The only thing that will grow from such measures is to yet again silence for another decade or more the cries for meaningful, fundamental tax reform that rebuilds the system from the ground up.

Make no mistake about it. We don’t need more tax reform that merely tinkers with the current system. We had too much of that, to no avail. We must get rid of this system once and for all and we must do it now. That’s what American taxpayers need and deserve.