Another way that government power has traditionally been limited is through the doctrine of the statute of limitations. That doctrine forces the government to bring a criminal case within a specified period in order to prevent it from harassing citizens by indefinitely threatening them with prosecution. The IRS faces a statute of limitations also, at least on paper. The Internal Revenue Code states that tax deficiencies must be assessed within three years of the filing of the return. The courts have taken this to mean that the IRS may not summon older records.
But the IRS has a variety of ways to get around that restriction. It is allowed, for instance, to examine older records if it claims they relate to a year within the allowable period. The agency has been permitted to go back as far as thirty years under that reasoning.
The IRS is also allowed an exemption to the statute of limitations if it suspects fraud. There has been much legal wrangling over what the IRS must do to show fraud for this purpose, and the courts have come down squarely on the agency’s side. A tax agent merely has to tell the court he has reason to suspect fraud in order to have access to records that otherwise would be beyond the allowable period. He need not show anything — not even probable cause. For Hamowy, “The Court’s position thus effectively destroyed any protection afforded a taxpayer from demands to produce his books and records by the statute of limitations.… [The IRS] may investigate capriciously and at its whim any period in the taxpayer’s history, thus making the statute of limitations meaningless.”43
The IRS also has administrative procedures that enable it to get around the statute of limitations. There is no rest for the weary taxpayer.
That pattern is repeated in many other areas of tax law. A restriction appears on the books. But administrative procedures and court interpretations nullify them. Restrictions can be set aside if the IRS believes tax collection is in jeopardy.44 The constitutional prohibition against unreasonable searches and seizures has few teeth when applied to the IRS. Apparently it is impossible for the Internal Revenue Service to act unreasonably. It can demand virtually anything it wants. It has been permitted, for example, to look at patients’ hospital records in order to investigate a doctor who was suspected of understating his income.45 Moreover, a taxpayer has no standing to make a Fourth Amendment challenge to a summons issued to a third party, such as a bank. Citizens, in other words, cannot look to their banks, or anyone else, for financial privacy. (The Orwellian Bank Secrecy Act essentially forbids bank secrecy.) James Payne calculated that third parties must report eighty-one types of personal information to the IRS.46
It gets worse. By law, the IRS is supposed to inform a taxpayer that his bank has been ordered to turn over records. That requirement is intended to permit the taxpayer to intervene and perhaps block compliance. But the IRS can circumvent the notification requirement by informally requesting records. Banks usually cooperate with the IRS — they can be intimidated too. The courts have okayed this obvious strategy to avoid having to notify taxpayers.47
The courts have also ruled that, for Fourth Amendment purposes, a taxpayer does not have an expectation of privacy when he turns his financial records over to an accountant. There is no accountant-client privilege. (As we have already seen with the doctor-patient privilege, the attorney-client privilege also can be breached under some circumstances.48)
On rare occasions, the IRS has been found to have illegally seized records. But it would be an error to conclude that the agency was therefore barred from using information that was improperly obtained. Unlike the normal criminal proceeding, where Fourth Amendment violations lead to suppression of evidence, in the tax arena, the evidence may be used to develop other evidence against the taxpayer. A finding of an illegal search has almost no consequences. “This ability to use evidence against a taxpayer that had been discovered through leads provided by illegally seized evidence provides a particularly potent weapon to the IRS,” Hamowy writes.49
Despite court declarations to the contrary, it is hard to square the vast powers of the IRS with the Bill of Rights, which is supposedly still cherished in the United States. There was a time when a man’s home was his castle. But that time ended when the taxation of incomes was permitted and the IRS was established by the U.S. Congress. Comparing the IRS’s investigative authority to that of the Star Chamber, Hamowy writes, “It is only a slight exaggeration to say that, in tax cases, the constitutional safeguard against unreasonable searches and seizures is attenuated to the point where it has no bearing on the activities of the IRS.”50
It would be wrong to think that the evils described here could be ended by enacting a better Taxpayers’ Bill of Rights, by putting better people in office, or by setting up stern congressional watchdog commissions. That would change very little, but it might produce a false sense of security. The abuse of taxpayers flows logically and inexorably from what the IRS was set up to accomplish: the collection of taxes on income. In a sense, it is not the IRS’s fault. As long as income is taxed, some government agency will be empowered to do the kinds of things that the IRS does today. The way to eliminate the evil of the IRS is to eliminate the evil of the income tax and the Sixteenth Amendment. Then, and only then, can the proper political relationship between citizen and state be restored.
In the chapter that follows we will look at how the income tax makes our whole society less prosperous.
Notes
1 James L. Payne, Costly Returns: The Burdens of the U.S. Tax System (San Francisco: ICS Press, 1993), pp. 137–38, 163–78.
2 Ibid., pp. 171–72.
3 Quoted in ibid., p. 70.
4 David Burnham, A Law Unto Itself: Power, Politics and the IRS (New York: Random House, 1989), p. 16.
5 Daniel J. Pilla, “Why You Can’t Trust the IRS,” Cato Institute Policy Analysis no. 222, April 15, 1995, at www.cato.org.
6 Burnham, p. 19.
7 Ibid., p. 21.
8 Ibid., p. 69.
9 Quoted in Charles Adams, For Good and Evil: The Impact of Taxes on the Course of Civilization (Lanham, Md.: Madison Books, 1993), pp. 385, 389.
10 Frank Chodorov, The Income Tax: Root of All Evil (New York: Devin-Adair, 1954), p. 65.
11 The IRS mission — depriving people of their property — is corrupt per se. But for documentation of conventional corruption — bribe-taking, et cetera — at the agency, see Burnham, pp. 167–98. Chodorov comments, “It is now part of the American folklore that agents of the Internal Revenue Bureau [as it was once called] have been amenable to bribery, that ‘pull’ has played a part in the adjustment of disputed tax returns, that cases against tax dodgers have been quashed by higher-ups after field agents have conscientiously worked them up” (p. 64). He adds that this ability to directly influence the IRS is available only to the well-off.
12 Burnham, pp. 255–90. Burnham was specifically referring to political and social activities and IRS control via the granting and withholding of tax-exempt status. But the power of the IRS goes beyond those areas and into the economic.
13 George Lardner Jr., “Nixon Sought ‘Ruthless’ Chief,” Washington Post, January 3, 1997, p. Al.
14 Burnham documents such abuses extensively in A Law Unto Itself, pp. 226–54. See also Pilla. Revelations continue to be made. See Tom Rhodes, “Kennedys Put Tax Squeeze on Foes,” Times of London, January 29, 1997 (Internet ed.). In a recent letter, Burnham wrote, “It appears, in fact, that President Franklin Roosevelt may have been the champion abuser” (Washington Post, Letter to the editor, January 26, 1997, p. C6).
15 As this book was being completed it was revealed that in fiscal 1994 and 1995 there were more than 1,500 cases of IRS employees’ misusing tax records. That is nothing new. See Stephen Barr, “IRS Audit Reveals More Tax Browsing,” Washington Post, April 9, 1997, p. Al.”
16 Burnham, p. 16.
17 Ibid., p. 45.
18 Ibid., p. 44. See also Pilla.
19 James Bovard, Lost Rights: The Destruction of American Liberty (New York: St. Martin�
�s Griffin, 1995), p. 270. See also Burnham, pp. 111–39, and Payne, pp. 50–52, 73–74.
20 Burnham, p. 60.
21 Ibid., p. 165.
22 Payne, p. 80. See also Martin L. Gross, “Taxpayer’s Rights: Almost None, “in The Tax Racket: Government Extortion from A to Z (New York: Ballantine Books, 1995), pp. 240–50. Gross writes that the bill has been of some “limited value” to taxpayers but was quickly seen as inadequate (p. 247).
23 Burnham, p. 310. Burnham adds that some members of Congress who might otherwise like to extend more legal rights to taxpayers fear angering the IRS (p. 303). Gross notes that a 1995 bill introduced by Rep. James Traficant, which would have shifted the burden of proof to the IRS, was buried in a House subcommittee (pp. 240–42).
24 Gross, p. 248.
25 “Nation’s Largest Taxpayer Group Praises Taxpayer Rights Bill, Urges More IRS Curbs,” National Taxpayers Union News Release, July 25, 1996, p. 2. The bill also gives taxpayers more scope to sue the IRS when it has been “reckless” and allows taxpayers who prevail against the IRS to recover more civil damages and attorney’s fees than previously.
26 Albert B. Crenshaw, “With Little Opposition or Debate, House Passes Bill That Would Overhaul IRS,” Washington Post, November 6, 1997, p. A14.
27 Burnham, pp. 141, 153. Quotas were formally outlawed in 1988, but Bovard says there is evidence they may continue informally (p. 269).
28 Bovard, pp. 268–69.
29 Ibid., pp. 266, 270.
30 Payne, pp. 73–74.
31 Ibid., pp. 71–72.
32 Bovard, p. 281.
33 Ibid., p. 283.
34 Shelley L. Davis, “The IRS Out of Control,” Wall Street Journal, April 15, 1996, editorial page. Also see “Why the IRS Is the Government’s Most Secretive Agency,” Chronicle of Higher Education, March 15, 1996, and Unbridled Power: Inside the Secret Culture of the IRS (New York: HarperCollins, 1997), both by Shelley Davis.
35 Ronald Hamowy, “The IRS and Civil Liberties: Powers of Search and Seizure,” Cato Journal 1 (Spring 1981): 225–75.
36 Ibid., p. 225.
37 Quoted in Adams, p. 388.
38 Hamowy, p. 233.
39 Ibid. p. 233. The quote is from the 1959 case United States v. First National Bank of Fort Smith.
40 Quoted in ibid., p. 260, from Schwimmer v. United States, a 1956 circuit court case.
41 Ibid., p. 235. The case was United States v. O’Connor.
42 Ibid., p. 238.
43 Ibid., p. 241.
44 See Payne, p. 246, note 8.
45 Hamowy, p. 244.
46 Payne, p. 137.
47 Hamowy, pp. 249–50.
48 See Payne, pp. 137, and 246, note 14.
49 Hamowy, p. 252.
50 Ibid., p. 253.
4
The Income Tax Makes You Poorer
We have seen how the income tax and all that follows logically from it offend the moral sense on which this nation was founded and subjugate people to the state. That in itself is enough to condemn it. But the harm does not stop there. The income tax is destructive in material terms. Because of that tax, you are likely to be poorer than you would otherwise be.
Society in general is poorer because, to use the distinction made by James Payne, of a double whammy: the tax burden and the tax-system burden.1 The money extracted by the income tax is, of course, money that cannot be consumed or invested to create prosperity. That is a huge cost. But beyond that, the system itself imposes a huge cost. Its arcane rules discourage productive enterprise. The system induces people to make decisions for tax purposes that they otherwise would not have made. It forces people to spend time and money complying with laws that change frequently. It creates uncertainty about the future. It imposes stress, as people wonder whether they have run afoul of the law. All of that represents a loss of well-being to people and their society. Payne conservatively estimates that those costs (in 1990 terms) come to more than $500 billion each year, or 65 percent of the money raised by the system. Many of the costs have gone up in the years since.2
The Market Process
To understand the complete burden, let us look briefly at a market economy unencumbered by an income tax. In the marketplace, people working under a division of labor produce and trade products and services, including labor. When people produce more than they consume, they save and invest. Rising living standards depend on savings and investment, which increase productivity and raise wages. Entrepreneurs, looking to earn profits, accumulate or borrow savings, which they use to purchase the labor and other resources required to make the things people will want to buy. The competitive market process results from the absence of legal barriers to production and exchange, in other words, from the protection of property rights.
The price system, which is generated ultimately by the buying and selling decisions of consumers, communicates information to all market participants about what should be produced. The system is particularly important for indicating to entrepreneurs where errors have been made in allocating resources among various consumer needs. If an entrepreneur makes a profit, that is a sign that the purpose to which he channeled labor and other resources was worthwhile in the eyes of consumers. The threat of losses is his reality check.
To highlight some key points about the market process: People earn income and profits through voluntary exchange for mutual benefit. In the market, all a producer can do is offer something at attractive terms. It is up to others to accept or decline the offer. Businessmen therefore must strive to serve the interests of potential customers. (In describing the workings of the market, it is immaterial that their motive is self-interest. Insofar as they seek income, they must look after the desires of consumers.)
We conclude then that when someone prospers in a market, it is a sign he has catered well to the wants and tastes of consumers. (He may be making things far removed from the retail level. But those things must contribute to the creation of valued consumer products or else his efforts will have no market value.) To put it another way, high incomes do not come at the expense of others generally. What is received as income is voluntarily given in exchange for something the buyer values more. Income is the reward for supplying something that people want. A high income is the reward for extraordinary foresight or ability. In a market economy disparities in incomes do not indicate that something is awry. They are a gauge of differences in the ability to serve consumers. People differ in that ability. Therefore incomes differ. It should be added here that the market offers no guarantees. Someone who is successful this year could fail next year. The Fortune 500 list in 1997 is different from the list in 1957 and 1977. Consumers can be fickle; they don’t care about past service. To become fixated on income levels and disparities, one must forget that people are constantly moving up and down the ladder. What counts is the lack of barriers to mobility, not disparity. The market economy permits mobility.
Another important thing to grasp is that although people with high incomes can enjoy high levels of consumption, they save more than others. They can afford to. But they don’t stuff the money in their mattresses. They invest it, and that investment benefits the entire society by bringing better and less-expensive products and services to the rest of us. In a market economy high-income people are led to raise everyone’s living standards, to quote Adam Smith, “as if by an invisible hand.” In moral terms, high incomes need not be justified by “service” to society at large. The voluntary process that produced the incomes sufficiently justifies them. But in economic terms, it is critical to understand that high incomes benefit the larger society. Even when rich people consume by buying furs and yachts they create employment opportunities for the less well-off. Recall that when Congress passed a luxury tax a few years ago, the biggest victims were working people who lost jobs — and the tax was for that reason repealed.
The upshot is that high incomes are an unmitigated blessing for society. They provide the incentives and resources for people t
o produce the things that make our lives better. A tax policy based on the idea that high incomes or income differences are maladies to be eliminated is a policy that will hurt the very people who are thought to need help.
The Income Tax Lowers Living Standards
It should be clear how the introduction of an income tax into the market process must depress the production of prosperity. (The same can be said for other kinds of taxes, of course.) Whether flat or progressive, an income tax takes increasing amounts of money from people as their incomes rise. Less money is left for savings and investment. The natural progress of the market toward higher living standards is thus stifled.
Income taxation transfers purchasing power to the government. By spending the revenue, of course, government transfers the wealth to others, a vast array of suppliers, welfare recipients, government employees, consultants, and so on. The people who produced the wealth cannot use it according to their preferences. People who did not produce the wealth are empowered to spend it according to theirs. The tax diverts the market process from the path it would have followed without the tax. No matter how it is imposed, it will rearrange resources. The market’s function of serving consumers is undermined because through the tax the government and its clients in part determine what is produced. Investment decisions are affected by what the government buys and whom it finances. Without the tax, the market carries out the wishes of consumers as anticipated by entrepreneurs. Consumers might have spent their money on televisions and compact discs. Or their savings might have gone to produce new things altogether. But the tax instead diverts their wealth to producers of, say, missiles, airplanes, military uniforms, spacecraft, paper clips, and whatever else the government buys. That leaves fewer scarce resources for what consumers want.
Your Money or Your Life Page 8