A Law unto Itself

Power, Politics and the IRS

David Burnham

• Publisher: Open Road Distribution
• Year: 2015
• ISBN:
  9781497696860
• Topic: Law
• Subtopic: Tax Law
• Index: Law

This is a fully documented inside examination of the Internal Revenue Service, in many ways the largest and most powerful of all federal agencies, and also the agency whose competent function is most essential to our democracy. The book's appearance in 1989 sparked a public furor and major legislation attempting to redress the IRS' many abuses of power, both political and bureaucratic. The book will be a relevant handbook as long as the agency remains a towering presence in American life.

CHAPTER 1

Thinking About Taxes and the Taxman

It was Benjamin Franklin, of course, who two hundred years ago told us that nothing was certain in this world except death and taxes.

This worn sample of Franklin’s elegant knack for stating big truths in simple ways came to mind a while ago as I began reading a stack of government reports on the Internal Revenue Service, nuclear war, and taxes. More specifically, the reports tell how the IRS and its parent agency, the Treasury Department, plan to go on collecting taxes from us after two hundred nuclear bombs have dropped on the United States and killed 100 million Americans, destroyed incalculable amounts of property, and incinerated a substantial part of the records that document the wealth of the nation.

Here, memorialized in the turgid prose of long-forgotten bureaucrats, was stated the absolute first rule of all governments: Nothing, not even the incredible destruction of nuclear war, is more important to any government than the collection of taxes.

Considering the awful mess these federal planners had been asked to resolve, the relentless optimism of their reports is both bizarre and touching. The title chosen by a midlevel Treasury Department technician for his February 1966 analytic report on tax policy in the postattack period tells it all: Fiscal Planning for Chaos. One has to be truly upbeat to develop a tax plan for chaos.

This 1966 study also reflected the perversely self-centered perspective common to all government bureaucrats. In one section, for example, the official indicated that his primary concern about a possible nuclear attack was the disorder that such a strike would bring to government rather than the unimaginable horror it would wreak on society. “Because the post-attack period would be one of chaos and disorganization of the revenue service,” the official warned, “emergency tax proposals for individuals, corporations and bank and nonbank financial institutions should be required to meet two standards. They are (1) revenue yield adequate for defense, short-term emergency needs and rehabilitation, and the quick restoration of services and damaged industrial facilities essential to national survival, and (2) simplicity of administration even to the exclusion of considerations of equity.”¹

The collected doomsday papers of the Treasury Department and its tax collection arm, the IRS, indicate that revenue collection after a nuclear attack remained a nagging concern throughout most of the cold war. A few months after the 1966 report, on the day after Christmas 1967, for example, Treasury Secretary Henry H. Fowler sent a confidential memo to Price Daniel, director of the Office of Emergency Planning. In ironic keeping with the seasonal tradition that it is better to give than to receive, Fowler informed Daniel of the department’s current thinking about how the nation’s taxpayers could go on paying taxes after a catastrophic nuclear attack and some of the working assumptions behind the project.

“For emergency planning purposes,” the Treasury Department statement began, “the estimate is widely used that a nuclear attack on U.S. metropolitan areas could result in 100 million casualties. Property damage would be incalculable in monetary values. That such devastation is considered a serious possibility forces us to the conclusion that no matter what form of tax system is adopted, one basic problem will be simplifying tax administration.”

Because Treasury believed it was likely that a nuclear attack would cause different levels of devastation in different parts of the United States, the department concluded that there would be some regions where “a tax system would not be necessary” and other areas where some kind of formal tax system could be maintained.

In the regions of catastrophic damage, where no tax collection would be feasible, the government would declare martial law and commandeer all available resources to meet emergency needs. In those areas, the government would confiscate all food stores to supply free “soup kitchens” and order healthy survivors to work in hospitals and other essential facilities. “Money payments could be suspended and tax collection could be suspended. Simply stated, everybody would be in the Army.”

But after the initial phases of the emergency in even the most hard-hit regions, Treasury predicted that a limited market economy and monetary exchange system would begin to emerge. In this second stage, the Treasury Department concluded, the actual collection of taxes would be required if the government was going to begin acquiring significant amounts of food, medicine, and other supplies by the payment of money. “A flat rate gross receipts tax would be simple to administer and fully adequate to economic requirements.”

The experts concluded that, as the American people began to rebuild during the post-attack period, “problems arising out of wide income differentials would not exist and the refinement of an income tax would not be necessary.

“Nevertheless,” they continued, “it would be desirable to have on the books a personal income tax at the outset of the emergency. The reasons for the very early establishment of a personal income tax even though the private economic sector may have ceased to function, are that (1) the Revenue Service should have time to plan the administration of the tax … and (2) liability should be established at the earliest phases of the emergency to tax illegal gains made by speculators and black market operators.”

One interesting little Treasury Department paper focused on the problems the IRS would face when it tried to measure wealth after a nuclear attack. “Consider a firm whose principal assets consist of a professional football team valued, pre-attack, at $15 million,” the study said. “Suppose that the players survived the attack and that all the debts of the team were fully paid up. Any plan to levy a net-worth tax post attack must face up to the fact that this firm’s relative worth in real terms is certainly not going to be the same as pre-attack.”

Once they had completed their deliberations, the Treasury Department and the IRS decided the time had come to ask Congress to grant the agency vast standby powers that might be needed should nuclear war actually commence. On October 31, 1977, IRS Commissioner Jerome Kurtz said the “basic purpose of the [proposed] legislation is to provide maximum flexibility and decentralization of authority in order that the Internal Revenue Service may effectively carry on operations in areas that have been subjected to an enemy attack.”

But even after Congress had approved the emergency powers legislation, the Treasury Department continued to worry about whether or not in the post-attack confusion the IRS would actually be able to collect taxes based on individual income. “If there is sufficient damage to the records normally required to document and determine income, it would be necessary to scrap the income tax system as we know it,” concluded a 1981 policy paper, Design of an Emergency Tax System.

“Instead of an income tax, one could design a general sales tax which would raise the revenue required. Such a tax should be implemented in this situation with as few as possible exemptions from the tax base. This has the dual feature of simple administration and the encouragement of savings to aid in the rebuilding of capital stock since with a consumption base, savings is exempted from the tax.”

The 1981 Treasury study concluded that the general sales tax “on final sales would have to be approximately 20 percent in order to replace current individual and corporate taxes, social security taxes and estate and gift taxes.” (In a subsequent paper, it was decided that the sales tax would have to be upped to 24 percent.)

The continuing trickle of policy papers and legislative proposals demonstrates that the top officials of the federal government of the United States were determined, come the hell of nuclear war or, implicitly, the high water of any natural disaster, to continue to collect taxes. In a most concrete way, the unswerving determination of these officials to complete their mission no matter how desperate the nation’s condition confirms the wisdom of the death-and-taxes observation of the sage of Philadelphia.

History, of course, is very much on Franklin’s side. No major civilization has shrunk from the essential and often unpleasant business of collecting taxes. In fact, one of the world’s first written references to taxes is a complaint about how the government in question had continued collecting a special war tax long after the war that had prompted it had ended. The Sumerian civilization began to flourish about 4000 B.C. on the fertile plain that lies between the Tigris and Euphrates rivers. On clay cones excavated near the ancient Sumerian city of Lagash, about 150 miles southeast of Baghdad, an unknown scribe told how the government had instituted a period of heavy taxation during a war but then refused to give up its taxing powers with the return of peace. The scribe wrote that from one end of the land to the other, even in the absence of fighting, “there were tax collectors.” Everything was taxed. Much to the outrage of the people, even the dead could not be buried without official tribute.

This period of intense taxation many thousands of years ago left its historical mark with the birth of a proverb that in various forms has continued to echo through the ages. “You can have a lord, you can have a king, but the man to fear is the tax collector.”²

The connection between burdensome taxes and war has since remained a subject of interest to both taxpayers and scholars. In the thirteenth century, for example, Thomas Aquinas noted that under normal conditions of peace the king should “live on his own.” But in time of war, when the king’s revenues might not be adequate, his subjects could be taxed to enable him “to provide for the common good from the common goods.”³

The ticklish problem of defining the common good almost always has been the troublesome stumbling block. In 1966, the most successful musical group of that period offered its negative view of the whole process in “The Tax Man”:

If you drive a car, I’ll tax the street

If you try to sit, I’ll tax your seat

If you get too cold, I’ll tax your heat

If you take a walk, I’ll tax your feet

Cause I’m the tax man

Yeah I’m the tax man.

Thus did the four young millionaires collectively known as the Beatles render their jaundiced view of the English tax collector.

Adam Smith, the great eighteenth-century economist, offered something far more constructive than tired complaints when he outlined the principles of fair taxation that to this day seem a model of good sense. The four key points, Smith contended, should be equality (proportional taxation), certainty, convenience of payment, and economy of collection. “The tax which each individual is bound to pay ought to be certain, and not arbitrary,” he wrote. “The time of payment, the manner of payment, the quantity paid, ought to be clear and plain to the contributor, and to every other person, so the tax payer is not put in the power of the tax gatherer.”

Smith’s words strike the contemporary American ear as an acute comment about the problems that continue to plague today’s Internal Revenue Service. “By subjecting the people to frequent visits and odious examination of the tax gatherers, it may expose them to much unnecessary trouble, vexation and oppression; and though vexation is not, strictly speaking, an expense, it is certainly equivalent to the expense that every man would be willing to redeem himself from it.”⁴

At about the same time that Smith was developing his sensible rules, Edmund Burke, a British statesman and historian, in an essay on the French Revolution of his time, mused on the absolute core connection of taxes and tax collection to the existence of the nation. As we shall see, this connection probably is the best single explanation why the Internal Revenue Service has been granted a unique set of powers. “The revenue of the state is the state,” Burke said.⁵

Since the beginning of recorded history, the power to tax, or not to tax, has been used for both good and ill. The application of this power often has a surprisingly modern ring. In the Old Testament Book of Ezra (7:24), for example, we are instructed about the tax exemption provided the established religion of that period. “It shall not be lawful to impose toll, tribute or customs” upon “any of the priests and Levites, singers, porters, Nethinium or ministers of this House of God.”

More recently, two Supreme Court justices, John Marshall and Robert Jackson, also offered up lessons about the far-reaching impact of taxes and tax collectors. “An unlimited power to tax involves, necessarily, a power to destroy; because there is a limit beyond which no institution and no property can bear taxation,” Chief Justice John Marshall wrote in 1819.⁶ More than one hundred years later, Associate Justice Robert Jackson, musing on the power of taxation, but from a slightly different perspective, wrote, “No other branch of the law touches human activities at so many points.”⁷

Over and over again, taxes and tax collectors have served as the engines of historical change. In the early days of the white settlement of North America, for example, opposition to the imposition of taxes was the motivating force behind two of the most significant events of American history.

In the first instance, the forces that ultimately led to the drafting of the Declaration of Independence in 1776 were set in motion eleven years before when the British Parliament passed the Stamp Act. In the second instance, the first serious exercise of power by the government of the United States came when the just-elected president, George Washington, marshaled an army to suppress the violent opposition of frontier farmers to a tax on whiskey. The single element common to these two events was what then and now is called the excise tax, sometimes a fee paid for a license to carry on certain occupations, sometimes a tax on the manufacture, sale, or consumption of such various commodities as liquor or tobacco.

The strong opposition of the North American colonies to the Stamp Act, Lord George Grenville’s 1765 excise tax, had many precedents in the mother country. As early as 1610, members of Parliament had denounced plans for the collection of what are also sometimes called interior or inland tax duties. And it was not until the outbreak of the Civil War in 1642 that the government was able to win Parliament’s reluctant consent for the first excise tax on the British people. Almost a century later, Sir Robert Walpole created a hurricane of opposition to the few excise taxes then on the books by calling for tougher collection procedures. Walpole’s plan generated the largest deluge of petitions and instructions from outraged constituents that up to that time had flooded Parliament. Members denounced the proposal on the grounds that it would create “swarms of tax gatherers,” standing armies, and “arbitrary laws of excise.” The Right Honorable William Pulteney, for example, argued that Walpole’s proposal “breathes nothing but the principles of the most arbitrary and most tyrannical governments that have been established in Europe.” He denounced the excise as “a badge of slavery.”⁸

Given Great Britain’s long history of opposition to the principle of the excise tax, Grenville’s 1765 request that Parliament impose the Stamp Act tax on the colonies to offset the expenses of defending them during the French and Indian War is somewhat surprising. Even more curious was Parliament’s professed difficulty in understanding the strong American objections to the tax. As argued in London by Franklin and others, winning the consent of the people through their chosen representatives was an essential precondition for the just collection of internal taxes, another name for the hated excise taxes. The strong feelings of the colonials generated so many protests and demonstrations that Grenville had second thoughts about the political wisdom of the Stamp Act tax, and it was withdrawn about a year after its imposition. But a germ of revolution had been planted in the body politic of the American people. It should also be noted that the legislation accomplishing Grenville’s tactical withdrawal from the political brier patch of the Stamp Act included strategic language asserting the broad power of Parliament to pass laws binding on the colonies. In 1767 Parliament acted on this general assertion when it approved the Townshend Act, which established a set of colonial duties on a number of items, including tea. Six years later, in 1773, a small group of outraged colonials dressed as Indians dumped cargoes of tea into Boston Harbor. Then, in April 1775, the long political debate about Britain’s right to impose excise taxes on the colonies changed character during a violent confrontation at Lexington and Concord. America’s Revolutionary War had began.

The subsequent victory of George Washington’s Continental Army over the British forces, however, did not resolve the dispute over who had the power to decide the taxes that would be paid by the American people. It just changed the locus of the debate. In 1781, the thirteen states approved the short-lived Articles of Confederation, reserving to their separate selves the power to tax. Seven years later, partly because of the major diplomatic and political problems created by the inability of the Confederation to collect taxes, a small band of men gathered in Philadelphia, ostensibly to devise ways ...

Table of contents

• Cover Page
• Title Page
• Dedication
• Contents
• 1. Thinking About Taxes and the Taxman
• 2. First Encounters with the IRS
• 3. Collecting Taxes
• 4. Nailing the Tax Criminals
• 5. Organized Crime Is an Enemy in Our Midst
• 6. New Math at the IRS: 2 + 2 = 3
• 7. The Zealots
• 8. Bribes, Boodle, and Buyoffs
• 9. Influence at the Top
• 10. Presidents, Politics, and the IRS
• 11. Curbing Political Dissent, Maintaining the Official Line, and Suppressing Unpopular Views
• 12. Oversight: Why the Watchdogs Seldom Bark
• 13. Tax Collection in the Next Decade
• 14. The Last Word
• Notes
• Selected Bibliography
• Appendix
• Index
• Acknowledgments
• Copyright Page