The Larger Lessons of the IRS Scandal

The Larger Lessons of the IRS Scandal: Far from being merely a one-time error, the IRS scandal is the result of... http://t.co/hbBwzIPNMl

— American Thinker (@amthinker) June 6, 2013

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One of the truest and most profound observations ever made was Lord Acton's "Power tends to corrupt and absolute power corrupts absolutely." All the scandals now engulfing the Obama administration are applications of Acton's profundity.

From the standpoint of ongoing damage, a danger even greater than corruption is abuse. Power, especially concentrated power, almost inevitably gets abused. If our goal is to avoid or minimize the abuse of power, our challenge is to minimize the concentration of power.

We have basically only two available choices for organizing a society and economy -- socialism or the market. The difference between those two systems is primarily a matter of where power and control will be vested. Will control be centralized or decentralized?

The benefits of organizing an economy and society around a voluntary-exchange market system are numerous. The most obvious is that the market is the most powerful wealth-producing force that ever existed.

Besides the vast difference in terms of wealth creation, a market economy and socialism differ in regard to who has power and whether or not power is concentrated. A voluntary exchange economy is the greatest limiter of concentrated power ever conceived. Socialism concentrates power, the market disperses it.

When you disperse power, you defang it. When you divide power into millions of pieces you remove most of its ability to do major and lasting damage. The greater the concentration of power, the greater the abuse. North Korea, Zimbabwe, and Cuba are extreme examples of that relationship.

Private businesses have strict limitations on their power mainly for two reasons -- (1) they interact with people through voluntary exchange, and (2) they have competitors. The existence of competitors means that their customers have alternatives. When a privately-owned business abuses any of its customers it pays a price in terms of lost sales.

Unlike the government, there is almost nothing that a private company can actually force you to do. You interact with Exxon or Microsoft by way of voluntary exchange. Each of them must entice you away from the many ways you can spend your money by offering something that has value to you. That something has to be competitively priced.

The IRS's abuse of power is aggravated by the characteristics of the power it has. Of all the thousands of government agencies, the IRS is the most intrusive into the lives of the citizenry. Law-abiding citizens are more afraid of the IRS than they are of the FBI.

The Internal Revenue Code is massive, incredibly complex, and incomprehensible. The complexity also opens the door to abuse. One reason most people are afraid of the IRS is that there are so many rules no one can know for sure he's not in violation of at least one. The sheer number of rules and complex definitions opens the door to selective enforcement. The agency's targeting of conservative groups was a case of selective enforcement.

The complexity of the code is also largely to blame for the fact that the agency adds insult to injury by taking not only our money, but also significant chunks of our time. Complexity also makes true enforcement impossible.

The operation of public agencies is qualitatively different from how the private sector operates. Entities in the public sector tend to be organized for the benefit of the employees and not the customers. Tenure, for example, is far more common in the public sector than in private companies. Because of tenure it is almost impossible to fire incompetent public school teachers. That's good for the incompetent teachers, but bad for the students.

Government agencies almost never have to worry about survival, no matter how poorly the agency is doing its job or even if it's a job that still needs doing. No private company's survival is guaranteed, especially over the long run. Private companies must forever fight for survival. Public entities have virtual eternal life.

When you deal with the IRS, the EPA, or your local building-permit bureaucracy, they hold all the cards. Each of these agencies and others like them has you at a distinct disadvantage. They have you at a disadvantage because you have no other options. They have the power to stop you in your tracks -- "my way or the highway." There is only one IRS, only one EPA. Power and control are largely a function of having alternatives. When conservative groups got abused by the IRS, there was no competing agency for them to try.

Obamacare will be an even more obnoxious intrusion into how we live our lives. A sad and dangerous detail of this further concentration of power is that the IRS will be the enforcer of Obamacare. We are about to embark on a substantial increase in the power and control of the IRS. The IRS is currently in the process of hiring an additional 16,000 agents to carry out its new Obamacare duties. The IRS will decide who will receive subsidies.

If Barack Obama achieves his ultimate objective of a "single-payer" health care system, there will be only one health care alternative. Single payer means single choice.

Being able to choose among alternatives is an essential element of freedom. Freedom doesn't mean much if you have only one option.

As a way for humans to interact, a decentralized market economy is vastly superior to the centralized, coercive, one-size-fits-all socialist model. This is true now and will be even truer in the future. The market offers consumers an ever-expanding menu of choices. If anything, the market's superiority is widening.

The popularity of socialism is a bubble. Admittedly it's a bubble with a long life span. Bubbles, however, eventually burst. Usually the demise of bubbles results in painful adjustments. The demise of socialism, however, would be a boon to mankind.

This particular scandal will eventually go away. We can replace individuals at the IRS but the structure will remain. It's the structure, not the individuals that is the problem. The only solution that will actually work in the long run is to stop and eventually reverse the growth of government. ______________________

Ron Ross Ph.D.A is an economist and author of The Unbeatable Market. He can be reached at rossecon@gmail.com.

FISCAL FITNESS: Down with the I.R.S.

Here's an easy question: What's the most hated institution in the country? The answer, of course, is the Internal Revenue Service - especially this time of the year. You probably think that the IRS is simply something we have to live with, that it's an unpleasant but necessary reality of modern living.

It could be, however, that ridding ourselves of the IRS is within the realm of feasibility. It is, in fact, a possibility that is being seriously examined not just among theoreticians but among persons in positions of authority as well.

The new chairman of the House Ways and Means Committee, the traditional source of tax legislation, is Bill Archer. In a recent interview with Businessweek magazine, Archer said, "I want to tear the income tax out by its roots ... (and) eliminate the IRS from our lives."

Without taxing income, where would the federal government derive its revenue? The most realistic and likely alternative is a national sales tax or a "value-added tax." We could tax consumption rather than income.

Replacing the revenue now collected from federal individual and corporate income taxes would require a sales tax rate of approximately 14 percent (applied to all final purchases of goods and services).

Ceasing income taxation would greatly reduce the government's intrusiveness into our lives. The reduction in the record-keeping burden alone would make a dramatic difference. Just imagine not having to keep and sort out all those records and documents every year as you prepare your tax return. That, however, is only the tip of the iceberg.

A vital difference between an income and a sales tax is this: An income tax is on people (and businesses) and a sales tax is on transactions. By its nature, an income tax necessitates the detailed monitoring of the lives of people. Nothing does as much violence to our privacy as the collection of income taxes. We've gotten used to it, but we would be much happier without it.

Ending income taxation would do wonders for the economy. The annual corporate income tax return for the Chrysler Corp., for example, is three feet high. Chrysler employs 65 people full-time to prepare its taxes. The expenditure of resources in preparing such documents increases the costs of products. It's estimated that it costs the economy as much as 60 cents to collect a dollar's worth of income tax revenue. Using income as the tax base is horrendously inefficient.

The tediously complex tax code also causes immeasurable distortions in the economy. Many individual and business decisions are based not on true costs and benefits, but rather on the artificial prize of tax avoidance.

The complexity of the tax code is a problem in itself. We expend vast amounts of time and talent struggling to cope with its labyrinthine provisions. Fair and effective enforcement is far beyond the IRS' capabilities.

We've attempted numerous times to simplify the tax code and it only grows more complex. It's time we recognized that a simple income tax is an oxymoron.

The absence of income taxes would increase the net reward of earning income from employment and investments. A sales tax would discourage consumption, and, by definition, income not consumed is saved.

We would solve the problem of our anemic savings rate. Savings provide the basis for investment, and the more we invest the faster we grow. Increased economic growth is one of the greatest gifts we could leave our grandchildren.

One drawback of converting to a sales-tax based system is that sales taxes are, to some extent "regressive." In other words, the percent you pay decreases as your income increases. I'm convinced, however, that the lower prices resulting from economic efficiencies and greater economic growth would result in low income people being markedly better off, on balance, than they are currently.

What would happen to the millions of people employed in tax return preparation and all the supporting activities? The money not spent on tax preparation would be spent or invested in something. Jobs would arise.

Tax preparers are typically bright, creative and well educated. They will find employment producing goods and services. The fact that millions are employed in helping the IRS collect revenue is another indication of its burden on the economy.

Individuals and businesses are draftees in the IRS revenue collection army. Ending the draft would generate more benefits than we could possibly imagine. You're going to hear a lot more about this proposal as more people realize that the IRS is something we can live without. -end-

A former professor of economics, Ron Ross is a financial planner with Premier Financial Group, Eureka.

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◼ FISCAL FITNESS: Down with the I.R.S. - North Coast Journal April 1995

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.