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Posts Tagged ‘IRS’

I realize this may be a thought crime by DC standards, but it sure would be nice to eliminate the high tax rates that undermine economic growth and reduce American competitiveness.

At the risk of sharing too much information, I fantasize about a world without the internal revenue code. In addition to getting rid of high tax rates, I also want to abolish the pervasive double taxation of income that is saved and invested.

Tax Code PagesJust as important, I want to wipe out the distorting loopholes that tilt the playing field in favor of politically connected interest groups. And I daydream about how much easier tax day would be if ordinary people didn’t have to figure out how to comply with an ever-changing tax code.

But perhaps you’re a normal person and you don’t dwell on these topics. Your fantasies probably have nothing to do with fiscal policy and instead involve that hottie in your neighborhood.

That’s fine. I’m actually envious of well-adjusted people who don’t fixate on the cesspool of Washington.

But – at the very least – I want you to agree that America needs fundamental tax reform. And to help persuade you,  here are some fresh stories to remind you that the tax code and the IRS are a blight on society.

For instance, how do you feel about the IRS engaging in partisan politics, as reported by the Washington Times.

Even as the IRS faces growing heat over Lois G. Lerner and the tea party targeting scandal, a government watchdog said Wednesday it’s pursuing cases against three other tax agency employees and offices suspected of illegal political activity in support of President Obama and fellow Democrats. …the Office of Special Counsel…said it was “commonplace” in a Dallas IRS office for employees to have pro-Obama screensavers on their computers, and to have campaign-style buttons and stickers at their office. In another case, a worker at the tax agency’s customer help line urged taxpayers “to re-elect President Obama in 2012 by repeatedly reciting a chant based on the spelling of his last name,” the Office of Special Counsel said in a statement. …Another IRS employee in Kentucky has agreed to serve a 14-day suspension for blasting Republicans in a conversation with a taxpayer.

For more information about this nauseating scandal, read the wise words of Tim Carney and Doug Bandow.

Or what about the time, expense, and anxiety that the tax code causes for small businesses? Heck, even the Washington Post has noticed this is a big issue.

More than half of small employers say the administrative burdens and paperwork associated with tax season pose the greatest harm to their businesses, according to a new survey by the National Small Business Association. Forty-seven percent say the actual tax bill hits their companies the hardest. On average, small-business owners spend more than 40 hours — the equivalent of a full workweek — filing their federal taxes every year. One in four spends at least three full weeks on the annual chore. There is also the expense of doing that work. Only 12 percent of employers filed their taxes on their own this year, down from 15 percent last year — and hiring help can be pricey. Half spent more than $5,000 on accountants and administrative costs last year. One in four spent more than $10,000.

I was tempted to say compliance costs add insult to injury, except that understates the problem. Watch this video if you want to understand why the tax code needs to be junked.

And let’s not forget that high tax rates are pointlessly destructive and bad for America. Dozens of companies have redomiciled in other jurisdictions to get out from under America’s punitive corporate tax system. And more are looking at that option. Here are some excerpts from a report in the U.K.-based Financial Times.

Walgreens has come under pressure from an influential group of its shareholders, who want the US pharmacy chain to consider relocating to Europe, in what would be one of the largest tax inversions ever attempted. …The move, known as an inversion, would dramatically reduce Walgreens’ taxable income in the US, which has among the highest corporate tax rates in the world. …In a note last month, analysts at UBS said Walgreens’ tax rate was expected to be 37.5 per cent compared with 20 per cent for Boots, and that an inversion could increase earnings per share by 75 per cent. They added, however, that “Walgreens’ management seems more hesitant to pull the trigger near-term due to perceived political risks.”

By the way, “perceived political risks” is a polite way of saying that the team at Walgreens is worried that the company might be targeted by the crowd in Washington. In other words, it will be attacked if it does the right thing for workers, consumers, and shareholders.

But that’s blaming the victim. All you really need to know is that America’s corporate tax system is so harsh that companies don’t just escape to Ireland, Switzerland, the Cayman Islands, and Bermuda. They even find better fiscal policy in Canada and the United Kingdom!

Last but not least, do you trust the IRS with your confidential financial data? If you answer yes, seek help right away from a mental health professional and check out these stories.

According to the Washington Times:

A new cost-saving computer technology being implemented by the IRS has left the agency vulnerable to hacking, putting taxpayers’ info at risk, an investigative report has found. …although the IRS has developed cybersecurity guidelines, many of the servers aren’t following them, said a report by the agency’s internal watchdog, the Inspector General for Tax Administration. In fact, the servers failed 43 percent of the tests investigators put them through, though they aren’t releasing what those tests and settings are due to security concerns.

According to a Bloomberg report:

A U.S. Internal Revenue Service employee took home a computer thumb drive containing unencrypted data on 20,000 fellow workers, the agency said in a statement today. …The IRS said it’s working with its inspector general to investigate the incident. The IRS statement didn’t say why the incident was discovered now, didn’t include the name of the employee who used the thumb drive and didn’t say whether the employee still works at the IRS.

And National Review has reported:

The Internal Revenue Service stole and improperly accessed 60 million medical records after raiding a California company, according to a legal complaint filed in March with the California superior court for San Diego. …“No search warrant authorized the seizure of these records; no subpoena authorized the seizure of these records; none of the 10,000,000 Americans were under any kind of known criminal or civil investigation and their medical records had no relevance whatsoever to the IRS search.”

So what’s the bottom line? I suppose there are different interpretations, but my view is that the system is irretrievably broken. It needs to be shredded and replaced.

What are the options?

My real fantasy is to have a very small federal government. Then we wouldn’t need a broad-based tax of any kind.

But I also have incremental fantasies. Until we can shrink the federal government to its proper size, let’s at least figure out ways of collecting revenue that are much less destructive and much less unfair.

The flat tax is one possible answer.

I’m also a fan of the national sales tax, though only if we first amend the Constitution to ensure that politicians don’t pull a bait-and-switch and burden us with both an income tax and sales tax!

To be more specific, I’m a fan of the Fair Tax, but only if we make sure that politicians never again have the ability to impose an income tax.

P.S. Since we’re on the subject of taxes, folks in Northern New Jersey, Southern New York, and New York City may be interested in a tax symposium this Thursday at Ramapo College in Mahway, New Jersey. Along with several other speakers, I’ll be pontificating on the following question: “The Income Tax:
Necessary Evil, Or the Root of All Evil?”

The college is convenient to I-287 near the New York/New Jersey border. Say hello if you attend.

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Looking at labor markets, my biggest concern is the drop in labor force participation.

The data from the Labor Department on the employment-population ratio, for instance, suggest a permanent reduction in the share of the population that is working.

And since economic output and living standards ultimately depend on the quality and quantity of labor and capital that is being productively utilized, it obviously is not good news that millions of people are no longer employed.

But if I had to identify a second-biggest concern, it would be the “Europeanization” of long-run unemployment in the United States. Specifically, we have a growing problem of too many people being unemployed for long periods.

I pontificate about this issue in a column for CNN.

…there are almost 4 million Americans who have been out of work for more than six months. That’s a big number. What’s disconcerting is that the current long-term unemployment is more serious than in previous economic downturns. Data from previous business cycles show people suffering from long-run joblessness at worst accounted for about 20% to 25% of the unemployed. In recent months, that percentage has jumped to nearly 40% — an all-time record! Indeed, America is beginning to look like Europe. It used to be that long-term unemployment in the U.S. was only a fraction of Europe’s, but the latest data from the Organization for Economic Cooperation and Development show that the United States has caught up to many of Europe’s welfare states. That’s not a race we want to be part of, much less win.

Here are some charts that illustrate the severity of the problem.

Let’s start with a look at what’s happened over time in the United States.

Long-Run Unemployment as Share of Unemployed

As you can see, the problem of long-run unemployment rises and falls with the business cycle. But during previous recessions, the share of the unemployed who were out of work for more than six months rarely climbed above 20 percent. And then the problem quickly got better once the economy began to recover.

That’s no longer the case. Long-term unemployment peaked at more than 40 percent of overall joblessness between 2010 and 2012. And even though we’ve supposedly been in a recovery since the summer of 2009, that number has fallen to only about 37 percent.

Now let’s compare the data from the United States to the numbers from other developed nations. As you can see, the United States used to have a huge advantage over other industrialized countries, but that gap has almost completely disappeared.

Long-Run Unemployment - US v OECD

We don’t know, to be sure, whether this represents a permanent change. But my concern is that we’re more and more likely to see bad European-type numbers now that we’re enduring European-type economic policies of bigger government and more intervention.

There is an alternative, which I explained in my CNN column, that could improve American labor markets.

…what’s the solution? There’s no silver bullet, but economic growth is the single most important key. …Unfortunately, …we’re still suffering through a sluggish economic cycle. Recent improvements in the overall employment rate are in large part the result of people dropping out of the labor force, and the problem of long-run unemployment has barely budged. To boost employment, we need the kind of strong growth America enjoyed during the Reagan and Clinton years, when millions of new jobs were created and the unemployment rate fell dramatically. To get there, we need a return to the types of free-market policies we got under Reagan and Clinton: a lower burden of government spending and less intervention from Washington.

Seems simple, right? We got good growth and job numbers during the Reagan and Clinton years, so we should replicate those policies.

But that hasn’t been the case. And the problem didn’t start with Obama, though he’s certainly made it worse.

…we’ve been moving in the exact opposite direction. Under both Presidents Bush and Obama, the size and scope of government has expanded, and the United States — which had the world’s third-most free-market economy when Bill Clinton left office — has now dropped to 17th in the Economic Freedom of the World rankings. We also need to make sure the unemployed don’t get lured into long-term dependency. One glaring example of misguided big-government policy is the argument to endlessly extend unemployment benefits. …Moreover, Obama’s proposed hike in the minimum wage…is the equivalent of sawing off the bottom rungs on the economic ladder. Simply stated, businesses create jobs when they think a new employee will help the bottom line. Artificially raising the cost of workers — particularly those with marginal skills — is a recipe for creating more unemployment.

I hate repeating myself, but it bears saying over and over again that the key to prosperity is small government and free markets.

But to the extent we become more like France and less like Hong Kong, we are doomed to get anemic economic performance and fall in the competitiveness rankings.

P.S. On another topic, it pains me to report that one of the worst examples of DC sleaze is about the become law.

The so-called farm bill has cleared Congress after corrupt Democrats seeking more food stamp spending Farm Bill Spendingjoined forces with corrupt Republicans seeking more agri-business welfare.

The invaluable Tim Carney describes the lobbyist feeding frenzy that produced this monstrosity.

A trillion-dollar, pork-filled farm bill stuffed with corporate welfare passed the House last week and cleared the Senate on Tuesday… The bill perpetuates the federal sugar program. Arguably Washington’s least defensible corporate welfare boondoggle, the sugar program keeps out foreign sugar, hiking prices for consumers, killing jobs for candy makers and enriching a few politically connected sugar producers. The farm bill replaces a flawed program of direct payments to farmers with a potentially more wasteful program of subsidized crop insurance, which takes money from taxpayers and gives it to banks and farming businesses. …The bill had its supporters, of course: the agribusiness lobby, the farm-finance lobby, the White House and the Congressional leadership of both parties. …The Ag lobby got what they wanted. The GOP leadership passed its bill. Democrats got their trillion-dollar price tag.

But here’s the part that really gets me pissed.

Lawmakers also stripped out of the final farm bill a provision that would have required congressmen to disclose the farm subsidies they receive from taxpayers.

This Chip Bok cartoon is a good summary of what happened.

Farm Bill Cartoon Bok

Just in case you need a reminder about why the Department of Agriculture should be abolished.

P.P.S. Since we’re sharing bad news, I’m sure you’ll be delighted to know that the new head of the IRS has decided to reward employees by giving them more of our money. Here are some excerpts from a report in the Washington Times.

Citing the need to boost employee morale, the Internal Revenue Service’s new commissioner said Monday that he will pay out millions of dollars in bonuses to agency employees, reversing a decision his predecessor made to save money… The move didn’t sit well with congressional critics who have been stupefied by the agency’s targeting of tea party groups… “It’s hard to think of a group of people less deserving of bonuses than IRS employees. Frankly, this is outrageous,” said Sen. Orrin G. Hatch of Utah, the ranking Republican on the Senate Finance Committee.

Hey, but nothing to worry about.

After all, the President has appointed one of his big donors to investigate whether anybody at the IRS did anything wrong.

And we already know the results of that investigation. As this Jerry Holbert cartoon notes, the President has told us there isn’t a smidgen of corruption.

IRS Musical Cartoon

Gee, I know I’m satisfied with that assurance. After all, the President would never lie to us, would he?

I guess this is what they mean by trickle-down government.

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It’s time to extinguish any lingering Christmas cheer. Today’s topic is over-bearing and tyrannical tax administration.

To be more specific, we’re going to look at the extent to which taxpayers are mistreated during the process of collecting revenue.

Yes, the amount that governments steal from you also is important, but that’s a topic we’ve already discussed on many occasions.

Moreover, we’re not going to focus on the IRS. Yes, the internal revenue service is infamous for its brutal and intrusive tactics. And I’m embarrassed to note that the United States scored very poorly in a Tax Oppression Index prepared by Switzerland’s Institut Constant.

But I want to focus today on places other than Washington. And the good news (at least relatively speaking) is that some countries scored even lower than the United States. The very worst nation was Italy, and you probably won’t be surprised that Germany (the country that figured out a way to use parking meters to tax prostitutes) and France were among the jurisdictions that also ranked below America.

This story from Brittany provides a rather appropriate glimpse at what it’s like to be a taxpayer in France.

For customers at the Mamm-Kounifl concert-café in Locmiquélic, carrying drinks trays and used glasses back to the bar was a polite tradition. But for social security agency URSAFF, it was also an infringement of labour laws because customers were acting like waiters, French local newspaper Le Télégramme reported.

But what’s really amazing is the way in which France’s revenue-hungry bureaucrats “caught” the alleged scofflaws.

“Around half-past midnight, a customer returned a drinks tray. She passed by the bar to go to the toilets. That was when it all kicked off.   My husband was pinned against the glass by a man. A woman leapt on me, showing her ID card and that’s when I realised it was a URSSAF check. They told me I had been caught using undeclared labour,” owner Markya Le Floch told Le Télégramme. …The authorities initially fined the pub owners €7,900 and briefly placed them in police custody. …URSSAF are still pursuing a social case and are now seeking €9,000 due to non-payment of the original fine.

Wow. This may be even more Orwellian than the FDA raid against the Amish farm that was selling unpasteurized milk to consenting adults. Or more absurd than the DEA busting a grandmother for buying cold medicine.

Imagine if the IRS adopted this French policy. If you take your significant other on a fancy date to McDonald’s and then carry your trash to the garbage receptacles, you’ll be guilty of providing “undeclared labor” and the tax police can then decide to impose taxes and fines because there could have been a taxable employee fulfilling that role.

I’m not joking. That seems to be the premise of the case in France.

Let’s now look at how taxpayers are treated by the various states here in America. Using data from the Council on State Taxation, the Tax Foundation has put together a map with grades for each state based on “good government” principles of tax administration.

Tax Administration Map of States

I’m surprised that Maine and Ohio rank so highly, particularly since neither state gets very good grades based on either Tax Freedom Day, aggregate tax burden, or the State Business Tax Climate.

But I’m not surprised that California ranks at the bottom. The state routinely gets bad grades on various measures of fiscal policy. No wonder so much income is moving out of the state. As for Louisiana, I can understand why Governor Jindal is so anxious to get rid of the state income tax.

Though the absence of a state income tax doesn’t guarantee good tax administration. Nevada, for instance, gets a poor grade in the COST survey.

P.S. If you like cartoons mocking California’s tax-and-spend politicians, click here, here, here, here, here, and here.

P.P.S. I’ve only shared one French-related cartoon, but you can seem my attempts at humorous captions here, here, and here.

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One of my missions in life is fundamental tax reform. I would like to replace the corrupt internal revenue code with a simple and fair flat tax.

Though what I really want is a tax system that minimizes the damage of extracting money from the productive sector of the economy, so I’ll take any system with a low rate, no double taxation, and no distortionary loopholes.

The national sales tax, for instance, also would be a good option if we can first repeal the 16th Amendment so there’s no risk that politicians would pull a bait and switch and saddle us with both an income tax and a sales tax (and in my ultimate fantasy world, we would shrink the federal government to the size envisioned by the Founding Fathers, in which case we probably wouldn’t need any broad-based tax at all).

While I normally make the economic case for tax reform, there are many reasons to fix our broken tax code.

Many Americans, for instance, are rightfully upset that the tax code is a 76.000-page monstrosity that enables the politically well connected to benefit from special provisions.

So we don’t know if the rich are paying an appropriate amount. Some of them are paying too much because of high rates and double taxation, while some of them are paying too little because they have clever lawyers, lobbyists, and accountants.

In an ideal world, if someone like Bill Gates earns 10,000 times as much as I do, then he should pay 10,000 times as much in tax. That’s a core principle of the flat tax.

But this post isn’t about why we need tax reform to promote economic growth or fairness. Instead, I want to focus on tax reform as a way of reducing welfare fraud. The Treasury Department just released a report acknowledging that the IRS made more than $100 billion of improper “earned income credit” payments over the past decade and that about one-fourth of all such payments are in error.

This Fox News article is a good summary. Here are the key details.

The Internal Revenue Service paid out more than $110 billion in tax credits over the past decade to people who didn’t qualify for them, according to a Treasury report released Tuesday. …IRS inspector general J. Russell George said more than one-fifth of all credits paid under the program went to people who didn’t qualify. …George said in a statement. “Unfortunately, it is still distributing more than $11 billion in improper EITC payments each year and that is disturbing.” …The agency said it prevents “nearly $4 billion in improper claims each year and is committed to continuing to work to reduce improper claims.” The EITC is one of the nation’s largest anti-poverty programs. In 2011, more than 27 million families received nearly $62 billion in credits.

Now some background. The “earned income credit” or “earned income tax credit” is actually an income redistribution scheme operated by the IRS. It’s basically a wage subsidy. If someone earns money (the “earned income” part), the law says the IRS should augment that money with a payment from the government (the “credit” or “tax credit” part).

The key thing to understand, though, is that the EITC is “refundable,” which is the government’s term for payments to people who don’t earn enough to owe any income tax. That’s why it’s primarily an income redistribution program. Only it’s operated by the IRS rather than the Department of Health and Human Service or some other welfare agency.

And when government is giving away other people’s money, there are those who will try to abuse the program. That’s true for corporate welfare, and it’s true for traditional welfare like food stamps. And, as we see from the Treasury report, it’s true for the EITC.

That’s the bad news.

The good news is that the EITC has a redeeming feature. Some lawmakers realized traditional welfare programs were very destructive because they paid people not to work. The EITC supposedly offsets that perverse incentive because you get the money only because you earn some income.

But now let’s share some additional bad news. The government takes away the EITC once your income reaches a certain level, and this is equivalent to a big increase in the marginal tax rate on earning additional income.

And when you combine the EITC with all the other redistribution programs operated by government, you create a huge dependency trap. Indeed, the chart shows that many of these programs can be larger than the EITC (which is called “negative income tax”).

So let’s adopt a flat tax and get rid of all the bad features of the tax system, including the EITC. Welfare and income redistribution are not proper roles of the federal government.

We’re far more likely to get good results – both for poor people and taxpayers – if we let state and local governments experiment and learn from each other on what actually helps people climb out of poverty.

P.S. I can’t overlook an opportunity to point out that today’s complicated and convoluted tax code is the reason why we have a powerful and intrusive Internal Revenue Service. And never forget that the IRS has a long record of abusive actions.

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President Obama promised he would unite the world…and he’s right.

Representatives from dozens of nations have bitterly complained about an awful piece of legislation, called the Foreign Account Tax Compliance Act (FATCA), that was enacted back in 2010.

They despise this unjust law because it extends the power of the IRS into the domestic affairs of other nations. That’s an understandable source of conflict, which should be easy to understand. Wouldn’t all of us get upset, after all, if the French government or Russian government wanted to impose their laws on things that take place within our borders?

But it’s not just foreign governments that are irked. The law is so bad that it is causing a big uptick in the number of Americans who are giving up their citizenship.

Here are some details from a Bloomberg report.

Americans renouncing U.S. citizenship surged sixfold in the second quarter from a year earlier… Expatriates giving up their nationality at U.S. embassies climbed to 1,131 in the three months through June from 189 in the year-earlier period, according to Federal Register figures published today. That brought the first-half total to 1,810 compared with 235 for the whole of 2008. The U.S., the only nation in the Organization for Economic Cooperation and Development that taxes citizens wherever they reside.

I’m glad that the article mentions that American law is so out of whack with the rest of the world.

We should be embarrassed that our tax system – at least with regard to the treatment of citizens living abroad and the treatment of tax exiles – is worse than what they have in nations such as France.

And while there was an increase in the number of Americans going Galt after Obama took office, the recent increase seems to be the result of the FATCA legislation.

Shunned by Swiss and German banks and facing tougher asset-disclosure rules under the Foreign Account Tax Compliance Act, more of the estimated 6 million Americans living overseas are weighing the cost of holding a U.S. passport. …Fatca…was estimated to generate $8.7 billion over 10 years, according to the congressional Joint Committee on Taxation.

I very much doubt, by the way, that the law will collect $8.7 billion over 10 years.

And it’s worth noting that President Obama initially claimed that his assault on “tax havens” would generate $100 billion every year. If you don’t believe me, click here and listen to his words at the 2;30 mark.

So we started with politicians asserting they could get $100 billion every year. Then they said only $8.7 billion over ten years, or less than $1 billion per year.

And now it’s likely that revenues will fall because so many taxpayers are leaving the country. This is yet another example of how the Laffer Curve foils the plans of greedy politicians.

You may be tempted to criticize these overseas Americans, but I’ve talked to several hundred of them in the past few years and you can’t begin to imagine how their lives are made more difficult by the illegitimate extraterritorial laws concocted by Washington. Bloomberg has a few more details.

For individuals, the costs are also rising. Getting a mortgage or acquiring life insurance is becoming almost impossible for American citizens living overseas, Ledvina said. “With increased U.S. tax reporting, U.S. accounting costs alone are around $2,000 per year for a U.S. citizen residing abroad,” the tax lawyer said. “Adding factors, such as difficulty in finding a bank to accept a U.S. citizen as a client, it is difficult to justify keeping the U.S. citizenship for those who reside permanently abroad.”

Imagine what your life would be like if you had trouble opening a bank account or conducting all sorts of other financial activities. Things that are supposed to be routine, but are now nightmares.

I collected some of the statements from these overseas Americans. I encourage you to visit this link and get a sense of what they have to endure.

And then keep in mind that all of these problems would disappear if we had the right kind of tax system, such as the flat tax, and didn’t let the tentacles of the IRS extend beyond America’s borders.

P.S. Based on people I’ve met in my international travels, I’d guess that, for every American that officially gives up their citizenship, there are probably a dozen more living overseas who simply drop off the radar screen. Many of these people can’t afford – or can’t stand – to deal with the onerous requirements imposed by hacks, bullies, and lightweights in Washington such as Barbara Boxer.

P.P.S. Remember the Facebook billionaire who moved to Singapore to escape being an American taxpayer? Many of us – including me – instinctively find this unsettling. But if we believe that folks should have the freedom to move from California to Texas to benefit from better tax policy, shouldn’t they also have the freedom to move to another nation?

The same is true for companies.

If our tax law is bad, we should lower tax rates and adopt real reform.

Unless, of course, you think it’s okay to blame the victim.

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There are lots of despicable people in Washington engaged in a lot of unsavory behavior, so it would be very difficult to get agreement if you asked regular people to select the most odious feature of the political class.

HypocrisyMany people would probably choose corruption as the defining characteristic of Washington, and it would be hard to argue with that choice, but I think hypocrisy is an even better choice.

There’s something fundamentally wrong when people push for policies while making sure they don’t have to abide by the results. Yet it happens all the time in government.

1. It galls me that the pro-tax bureaucrats at the OECD get tax-free salaries while pushing for higher taxes on everyone else.

2. Or how about rich left wingers who bleat about compassion but who are stingy with their own money.

3. And the wealthy leftists who use tax havens while trying to deny others from protecting their money.

4. There are members of the Washington elite who don’t have to live under the gun control laws they impose on others.

5. What about the politically connected business types who endorse higher taxes in exchange for favors from Washington.

6. Or the politicians who evade the taxes they impose on ordinary citizens.

7. How about Canadian politicians who support government-run healthcare but then come to America when they need treatment.

8. To close this list on a humorous note, we also have Occupy Wall Street protesters who fight “The Man” while wanting to make “The Man” more powerful.

But if you want a really powerful example of hypocrisy, nothing stands out more than politicians trying to exempt themselves from Obamacare.

Crocodile TearsThey’ve even been complaining that the law is so bad that they may quit their jobs. And they’re so disconnected from reality that they think we’ll be upset at the loss of their “seniority” and “experience” – as if taxpayers value their ability to squander money.

But it’s not just politicians who are being hypocritical. The bureaucrats at the IRS also don’t want to live under Obamacare – even though they’re the ones who will be forcing us to live under that misguided law!

Here are some excerpts from a report in the Washington Examiner.

IRS employees have a prominent role in Obamacare, but their union wants no part of the law. National Treasury Employees Union officials are urging members to write their congressional representatives in opposition to receiving coverage through President Obama’s health care law. …Like most other federal workers, IRS employees currently get their health insurance through the Federal Employees Health Benefits Program, which also covers members of Congress. House Ways and Means Committee Chairman Dave Camp offered the bill in response to reports of congressional negotiations that would exempt lawmakers and their staff from Obamacare. …Camp spokeswoman Allie Walker said. “If the Obamacare exchanges are good enough for the hardworking Americans and small businesses the law claims to help, then they should be good enough for the president, vice president, Congress and federal employees,” she also said.

To augment the remarks of Rep. Camp’s spokeswoman, it also would be good to somehow figure out a way to make the lobbyists and other Washington insiders participate in the Obamacare exchanges.

There aren’t many “sure things” in life, but one of them is that Obamacare would be repealed almost instantaneously if the bigwigs in Washington actually had to live under the law designed for peasants like you and me.

Unfortunately, that’s why Congressman Camp’s legislation will never get approved.

So let’s end this post with a bit of dark humor from Bob Gorrell.

Obamacare Cartoon July 2013 6

You can enjoy more Obamacare cartoons by clicking here, herehereherehere, and here.

P.S. For readers in New Jersey (and also New York City), I’ll be speaking this upcoming Wednesday, July 31, at the Friedman Day luncheon sponsored by Americans for Prosperity.

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Exactly three years ago, I posted a simple quiz about libertarians and patriotism.

The two questions in that quiz are illuminating since they highlight how libertarians in some cases may differ from conservatives (click here for more on that issue), but I also included this t-shirt, which seems to capture the mindset of a lot of Americans regardless of their political outlook.

Well, it seems that Mark Twain had the same attitude as the young lady in the photo, at least if we can believe the quote in this Steve Breen cartoon.

Simply stated, our loyalty should be to a set of ideals, not to any particular group of people who happen to hold power.

Patriotism Cartoon

What makes the cartoon so effective, though, is the inclusion of an IRS thug and a snoop from the NSA.

Reminds me of this cartoon about Obama and the Founding Fathers.

But there’s a serious point to discuss. Are we losing our freedoms and giving the state too much power and authority?

According to a recent news report, a former lieutenant colonel for the infamous East German STASI spy agency says the NSA-type snooping ability “would have been a dream come true.”

Wolfgang Schmidt…pondered the magnitude of domestic spying in the United States under the Obama administration. A smile spread across his face. “You know, for us, this would have been a dream come true,” he said, recalling the days when he was a lieutenant colonel in the defunct communist country’s secret police, the Stasi. In those days, his department was limited to tapping 40 phones at a time, he recalled. Decide to spy on a new victim and an old one had to be dropped, because of a lack of equipment. He finds breathtaking the idea that the U.S. government receives daily reports on the cellphone usage of millions of Americans and can monitor the Internet traffic of millions more.

I’ve already written that we do have enemies and that I think it’s okay to spy on those enemies (though I want the government to get judicial approval before spying on Americans).

But I also wrote that spying should be subject to cost-benefit analysis. The NSA info-gathering exercise reminds me of anti-money laundering laws and those laws are a costly failure. They invade our privacy, hurt the poor, impose high regulatory costs, and have little or no impact on underlying crimes.

We also need to be concerned about potential misuse of data, whether by people currently in the government or those that will have access to the information in the future.

This is what worries me the most. Simply stated, I don’t trust people in government. Which, rather ironically, means I’m in agreement with a former STASI bigwig.

Even Schmidt, 73, who headed one of the more infamous departments in the infamous Stasi, called himself appalled. The dark side to gathering such a broad, seemingly untargeted, amount of information is obvious, he said. “It is the height of naivete to think that once collected this information won’t be used,” he said. “This is the nature of secret government organizations. The only way to protect the people’s privacy is not to allow the government to collect their information in the first place.”

Hmmm… maybe being warned about the risk of unrestrained government by a former communist spy is the modern equivalent of being called ugly by a frog?

In any event, I suppose Herr Schmidt has first-hand knowledge of the danger of giving government too much information.

P.S. Speaking of first-hand knowledge, it’s somewhat amusing that former communists in Russia and current communists in China have told the Europeans that the welfare state breeds too much dependency.

P.P.S. While this post has touched on libertarians and patriotism, fairness requires me to acknowledge that leftist politicians also believe in a form of patriotism.

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What do you do if you’re part of a government bureaucracy that has been caught red-handed engaged in sleazy, corrupt, and (almost surely) illegal targeting of Americans for their political beliefs?

But before you answer, keep in mind that your bureaucracy also has been exposed for wasting huge amounts of money at lavish conferences. What’s the ideal way of dealing with the fallout from that scandal as well?

The answer is simple. Even though you and your pals already are paid more than the peasants in the private sector, give yourself and your cronies giant bonuses!

I’m not joking. Here are some excerpts from an AP report.

The Internal Revenue Service is about to pay $70 million in employee bonuses despite an Obama administration directive to cancel discretionary bonuses because of automatic spending cuts enacted this year, according to a GOP senator. …“The IRS always claims to be short on resources,” Grassley said. “But it appears to have $70 million for union bonuses…” Three congressional committees and the Justice Department are investigating the targeting of conservative groups. And key Republicans in Congress are promising more scrutiny of the agency’s budget, especially as it ramps up to play a major role in implementing the new health care law.

Sort of makes this cartoon self evident.

IRS Trust Cartoon

Indeed, this motivates me to announce “Mitchell’s First Theorem of Government.”

I’ve explicitly expressed this sentiment in the past, and hinted at it here, here, and here.

Now it’s time to make it official.

Mitchell's First Theorem of Government

I hope you’ll agree this is a nice addition to Mitchell’s Golden Rule, Mitchell’s Bleeding Heart Guide, and Mitchell’s Law.

And maybe one of these will catch on and I can be famous like Art Laffer.

P.S. Enjoy some cartoons about the IRS scandals here, here, and here.

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I was thinking of writing something deep and profound, but then I saw this cartoon. For those of us who love the IRS, it’s too good not to share.

IRS Frankenstein Cartoon

Frankenstein periodically appears in political cartoons, including this Glenn Foden IRS cartoon and these Henry Payne cartoons about Romneycare and Obamacare.

Sort of makes you wonder why there’s so much discrimination against the Mummy, Count Dracula and the Werewolf? Maybe we can ask the EEOC to launch an investigation after they’re done trying to coerce businesses into hiring ex-convicts.

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Call me perverse, but I’m enjoying this IRS scandal. It’s good to see them suffer a tiny fraction of the agony they impose on the American people.

I’ve already shared a couple of cartoons on the topic, and I also posted a photo from my newest sports hero that captures how most of us feel about the least-favorite part of the federal behemoth.

Now let’s enjoy some additional cartoons. Let’s start with one from Michael Ramirez, which appropriately mocks Obama for saying we shouldn’t fear the government.

IRS Cartoon 10

Here’s Henry Payne’s contribution, which reminds me that the IRS actually expects us to believe they didn’t engage in political bias.

IRS Cartoon 9

And Ken Catalino suggests that the federal government treats Americans with the same suspicion and hostility accorded to terrorists.

IRS Cartoon 8

Though we should be happy that we’re not being targeted for drone attack. At least not yet.

Speaking of targeting, here’s another Catalino cartoon that recreates a meeting at the IRS.

IRS Cartoon 7

I like this Glenn Foden cartoon, if for no other reason that it would be nice to see taxpayers march on Washington to slay the IRS monster.

IRS Cartoon 6

Here’s another Foden cartoon, which I like because it has the same theme as this Jerry Holbert cartoon, showing big government as a destructive and malicious force.

IRS Cartoon 5

These two Eric Allie cartoons (here and here) have a more charitable interpretation, implying that the damage is unintentional.

Here’s another gem from Ramirez, winner of my cartoonist contest.

IRS Cartoon 4

Lisa Benson weighs in with a cartoon on the army of drones. Sort of like this very good Glenn McCoy cartoon.

IRS Cartoon 3

Here’s another cartoon from Henry Payne, showing Obama’s faux scolding of the IRS.

IRS Cartoon 2

Last but not least, this Chuck Asay cartoon may be the best of the bunch. When we get in trouble with the IRS (even if we’ve done nothing wrong), we’re guilty ’til we prove ourselves innocent.

Too bad we can’t exercise our rights, just like the IRS hack who just pleaded the fifth and refused to answer questions about her role in the scandal.

IRS Cartoon 1

Now that I’ve shared all these cartoons, let’s remember that we should assign some of the blame to politicians.

And I’m not referring to the President and the culture of corruption and Chicago-style sleaze that seems to be engulfing the Obama Administration.

I’m talking about the constant legislative tinkering and the 74,000 pages of Byzantine complexity that has been created in the 100 years since the income tax was created.

However, there are many reasons why the IRS bureaucracy deserves scorn.

So let’s pass the flat tax, but never forget that a disproportionate share of bad people seem drawn to government.

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With so many scandals percolating, there are lots of good cartoons being produced.

But I think this Chip Bok gem deserves special praise.

It manages to weave together both the costly Obamacare boondoggle with the reprehensible politicization of the IRS.

So BOHICA, my friends.

IRS Obamacare

If you want other Chip Bok cartoons, click here, here, here, here, here, here (my favorite), here and here.

And for cartoons that mix the IRS and Obamacare, click here, here, and here.

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When I was a little kid, my sports idol was Mickey Mantle.

When I went to college, Herschel Walker was my guy.

Now, I may have to add Evan Mathis to that distinguished list.

Who is Evan Mathis, you ask?

Well, he’s an offensive lineman for the Philadelphia Eagles who played in college for the Crimson Tide of Alabama.

2012 - UGA-BamaSince I’m a Georgia Bulldog, I wouldn’t normally hold someone from ‘Bama in high esteem – especially since I haven’t stopped sulking since the SEC Championship Game. but when someone does something that merits high praise, I’m willing to be ecumenical.

And Evan Mathis passes that test, as explained by NBC Sports.

Already the least popular of the federal governmental agencies, the IRS has taken a significant hit in recent days amid news confirming longstanding beliefs that the U.S.Evan-Mathis-Peeing-IRS-Sign tax department exercised its discretion to conduct audits and generally give folks a hard time with politics in mind. Like most if not all Americans, Eagles offensive lineman Evan Mathis doesn’t like it.  Unlike most if not all Americans, Mathis has opted to make his views known, in an entertaining way. Mathis posted on Instagram a photo of himself in the universal standing pee position by an IRS sign, with the message “Audit this.”

So what message was Mathis trying to send? It’s unclear, but there are many reasons why the IRS deserves scorn.

No wonder I thanked President Obama for unleashing this new scandal and reminding many new people that they should listen to those “voices” who warn about unchecked power in Washington.

P.S. I’m not sure how I’ll react when the IRS resorts to the novel tax-collection tactic that’s being tried in Pakistan.

P.P.S. Maybe Mathis can become a national spokesman for tax reform after he retires from football.

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Last week, while writing about the latest IRS scandal, I noted that the IRS has a long record of abusive actions.

So I wasn’t surprised to learn that it also has politically biased employees.

But some Americans probably are shocked. So I want to be the first to publicly thank President Obama for – at the very least – presiding over a culture that gave IRS bureaucrats the green light to engage in this kind of misbehavior.

Why am I thanking Obama? For the simple reason that this scandal means that more Americans now understand that the IRS is a venal agency. And that presumably means that more Americans now realize we should junk the internal revenue code and implement a simple and fair flat tax.

Since I’m in an expansive and sharing mood, I think we also owe some appreciation to some of the good people who are helping to publicize the IRS’s despicable behavior.

Let’s start with George Will, who is predictably – and bitingly – critical.

…the nature of Barack Obama’s administration is being clarified as revelations about IRS targeting of conservative groups merge with myriad Benghazi mendacities. …we are told that a few wayward souls in Cincinnati, with nary a trace of political purpose, targeted for harassment political groups with “tea party” and “patriot” in their titles.  …Jay Carney, whose unenviable job is not to explain but to explain away what his employers say, calls the IRS’s behavior “inappropriate.” No, using the salad fork for the entree is inappropriate. Using the Internal Revenue Service for political purposes is a criminal offense.

I also like that Will took the opportunity to criticize the worst (or at least close-to-worst) President in American history.

Time was, progressives like the president 100 years ago, Woodrow Wilson, had the virtue of candor: He explicitly rejected the Founders’ fears of government. Modern enlightenment, he said, made it safe to concentrate power in Washington, and especially in disinterested executive-branch agencies run by autonomous, high-minded experts. Today, however, progressivism’s insinuation is that Americans must be minutely regulated because they are so dimwitted they will swallow nonsense. Such as: There was no political motive in the IRS targeting political conservatives.

How painfully true. Sheep are not famous for their intelligence. And as the American people learn to be passively dependent on government, presumably we will acquire more sheep-like characteristics.

But the firestorm of protest leads me to think we’re not at that stage. At least not yet.

The lawless and abusive IRS even got Michael Gerson agitated.

…most Americans, myself included, become libertarians when a policeman is rude and swaggering during a traffic stop. Give me that badge number. It is precisely because police powers are essential to the public good that abusing them is so offensive. The same holds for overzealous or corrupt airport-security agents. And it is doubly true with IRS personnel who misuse their broad and intimidating powers. It is enough to bring out the Samuel Adams in anyone.

And here’s what my colleague Gene Healy wrote about the IRS’s history of political shenanigans.

Past presidents have found the IRS an extremely useful piece of federal machinery for that purpose. A lot of what we know about that sordid history comes from the Senate Select Committee on intelligence abuses, chaired by Sen. Frank Church, D-Idaho, in the mid-’70s. As Chris Hayes wrote in the Nation in 2006, “Church and many Democrats…soon found that presidents of both parties were culpable: “Secret documents obtained by the committee even revealed that the sainted FDR had ordered IRS audits of his political enemies.” In “The Lawless State,” his account of the Church Committee revelations, Morton Halperin noted that “the first organized political ‘strike force’ was formed within the IRS in 1961, and was directed against right-wing political groups.” In this case, I doubt there was ever a JFK or Nixon-style direct command from on high to harass the Tea Party. It’s more likely to be a case of “proactive” bureaucrats inspired by presidential railing against the Tea Party and Citizens United: “Will no one rid me of these meddlesome right-wing freaks?”

Let’s close with a couple of good cartoons.

The first one reminds me of the joke that “Service” is part of the IRS’s name, but only in the way that a bull services a cow.

IRS Tea Party Cartoon 1

The humor is a bit darker in this cartoon, but the message is the same.

IRS Tea Party Cartoon 2

P.S. Since I’m in such a good mood,  I’ll share some of my other IRS humor, including a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a sale on 1040-form toilet paper (a real product), a song about the tax agency, the IRS’s version of the quadratic formula, and (my favorite) a joke about a Rabbi and an IRS agent.

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I’m happy to bash the IRS, but I usually try to explain that our anger should be focused on the politicians who created the corrupt, 74,000-page tax code.

But sometimes the IRS deserves some negative attention. The tax collection bureaucracy has thieving employees, incompetent employees, thuggish employees, brainless employees, and victimizing employees.

The senior folks at the IRS also deserve scorn for bone-headed decisions such as squandering millions of dollars on a P.R. campaign and a scheme to regulate and control private tax preparers.

Now it seems we have another reason to condemn the tax-collection bureaucracy. The IRS is engaging in Nixon-type political harassment.

Here’s some of what the Associated Press just reported.

The Internal Revenue Service inappropriately flagged conservative political groups for additional reviews during the 2012 election to see if they were violating their tax-exempt status, a top IRS official said Friday. Organizations were singled out because they included the words “tea party” or “patriot” in their applications for tax-exempt status, said Lois Lerner, who heads the IRS division that oversees tax-exempt groups.

Heaven forbid somebody self-identify as being patriotic. Obviously a cause for investigation by the IRS.

And it’s rather ironic that the IRS felt compelled to apologize just a few days after President Obama just told us we shouldn’t listen to “voices” telling us that bad things happen in Washington.

But it’s not just that the IRS targeted groups opposing big government. The bureaucrats also violated the rules designed to protect taxpayers from IRS abuse.

…groups were asked for their list of donors, which violates IRS policy in most cases, she said. “That was wrong. That was absolutely incorrect, it was insensitive and it was inappropriate. That’s not how we go about selecting cases for further review,” Lerner said at a conference sponsored by the American Bar Association. “The IRS would like to apologize for that,” she added.

But you can put your mind at ease because senior IRS officials assure us that the targeting of Tea Party groups had nothing to do with political bias.

Lerner said the practice was…not motivated by political bias. …IRS Commissioner Douglas Shulman told Congress in March 2012 that the IRS was not targeting groups based on their political views. “There’s absolutely no targeting. This is the kind of back and forth that happens to people” who apply for tax-exempt status, Shulman told a House Ways and Means subcommittee.

Just like we’re supposed to believe that political bias had nothing to do with all the IRS harassment of conservative groups during the Clinton years. The message from the elites in Washington is “Nothing to see here, move along.”

But as the Wall Street Journal warned at the time, it seems there is a remarkable lack of curiosity about patterns of IRS abuse.

…once we agree that a politicized IRS is a dangerous thing, it is hard to understand the see-no-evil approach taken by the Congress, the press and the judiciary about serious, current allegations of exactly this. …organizations have been using the Freedom of Information Act to find out if there is anything to the extraordinary run of audits that happened to hit a number of tax-exempt organizations that might reasonably be described as Clinton enemies. …we have lots of Clinton enemies who have suffered actual audits, and very little interest in finding out whether this was simply a massive coincidence or the result of something more sinister.

And now we’re going through the same process again.

Maybe, just maybe, there’s a lesson to be learned about the dangers of giving power to politicians and bureaucrats.

Yet another argument for the flat tax. If there’s no charitable deduction, there’s no opening for a politically biased IRS bureaucracy to investigate and harass non-profit groups because of their philosophical beliefs.

P.S. On a lighter note, here’s the IRS version of the quadratic formula, and a cartoon showing how GPS would work if operated by the IRS.

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I just saw a headline that made me think that libertarian fantasies somehow had turned into reality.

As you can see, 24 IRS employees were just arrested for stealing. But what about the other 105,976 bureaucrats at the Internal Revenue Service who seize our money under the implied threat of violence?

Shouldn’t they be arrested for stealing from us as well?

IRS Employees arrested

But then my bubble burst. The story has nothing to do with the injustice of the internal revenue code and the shakedown of American taxpayers.

It turns out that these IRS bureaucrats were busted for getting unauthorized government handouts.

…authorities say Internal Revenue Service employees in Tennessee were stealing unemployment and other benefits while fully employed. On Thursday, 13 of those employees were indicted on federal charges that they lied to get unemployment, food stamps, welfare and housing vouchers. An additional 11 have been indicted on state charges of theft greater than $1,000.

In other words, these “public servants” were guilty of a form of triple dipping.

  1. They took money from taxpayers as part of their excessive compensation packages.
  2. Their day job was to then enforce a coercive and reprehensible tax system that took money from taxpayers
  3. And they then bilked taxpayers yet again by mooching from various handout programs.

I’m actually surprised that they got arrested. Based on Keynesian economics, they should get medals for “stimulating” the economy.

P.S. All humor aside, non-anarchist libertarians face an interesting mental challenge. Many of them view the tax system as a form of theft. And there’s no question that it is enforced – ultimately – at the point of a gun. But with the exception of anarcho-capitalists, libertarians support the kind of limited government envisioned by the Founding Fathers. So how do you justify the taxes needed to finance that limited public sector? Most people would justify tax systems if they’re the result of a democratic process, but libertarians believe in rights rather than untrammeled majoritarianism. So how can they rationalize taxation? I freely confess that I don’t have the right answer. As I’ve noted before, I’m a practical libertarian, not the theoretical type. My job is to somehow figure out how we can shrink the federal government back to 3 percent of economic output. After that, the theoretical libertarians can figure out the thorny issues.

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For the past 30 or so years, I’ve done my own taxes by hand. I thought this was a good approach because it would help me better understand the practical challenges of the tax code.

Bravest man IRS

Dan Mitchell has dropped out of this contest

But it’s time to confess that I broke down and used Turbotax for yesterday’s tax return.

It’s not that my financial affairs are complicated. I basically get my Cato salary and a bit of income from speeches and articles. But even that became too much of a challenge. The tipping point was the form for Health Savings Accounts. The IRS is yelling at me for how I filled out this form in past years, and I fear that I will be perpetually in their cross hairs without relying on a computer program to avoid mistakes.

To help me deal with yesterday’s traumatic experience, I’m sharing some very good cartoons.

We’ll start with one from Gary Varvel.

IRS Cartoon 1

Sort of the visual version of this letter-to-the-editor.

Our next cartoon, which may be my favorite of the group, is from Glenn McCoy.

IRS Cartoon 2

By the way, if you don’t think the IRS is capable of thuggery, read this horrifying story.

I don’t know Paul Fell’s work, but this next cartoon is a very good introduction.

IRS Cartoon 3

This is the second time the grim reaper has appeared in a cartoon. The first time involved the death tax.

Last but not least, we have a Chip Bok cartoon about tax code complexity.

IRS Cartoon 4

As a bonus, it also features the complexity of Obamacare. If you like cartoons that mix the IRS and Obamacare, check out this classic from Glenn McCoy and this gem by Gary Varvel.

If you still need to be cheered up, here’s some more IRS humor to brighten your day, including the IRS version of the quadratic formula, a new Obama 1040 form, a list of tax day tips from David Letterman, a cartoon ofhow GPS would work if operated by the IRS, an IRS-designed pencil sharpener, a sale on 1040-form toilet paper (a real product), and two songs about the tax agency (here and here),  and a PG-13 joke about a Rabbi and an IRS agent.

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I’m not a big fan of the Internal Revenue Service, though I try to make sure that politicians get much of the blame for America’s convoluted, punitive, and unfair tax code.

Heck, just look at these three images – here, here, and here – and you’ll find startling evidence that politicians make the tax system worse with each passing year.

But there is an office at the IRS that ostensibly exists to defend the interests of taxpayers. The Taxpayer Advocate Service, according to the government website, “an independent organization within the IRS and helps taxpayers resolve problems with the IRS and recommend changes that will prevent the problems.” The head of this office, Nina Olson, has the title of National Taxpayer Advocate.

Sounds good, right?

Well, not so fast. The TAS does some good things, but Ms. Olson spends at least part of her time advocating for the government.

The TAS just released its annual report, and here’s some of what the bureaucracy recommended, according to a Bloomberg story.

Among the other problems Olson identifies in the report are…the underfunding of the Internal Revenue Service… The IRS, which Olson compares to the accounts receivable department of a company, should be fenced off from more budget cuts by Congress, she writes in the report.

Don’t rub your eyes or clean your glasses. You read correctly. The folks at the IRS who supposedly are advocating for you are instead advocating for a bigger IRS budget.

I debunked this silly argument last year, explaining why Congress should reject the Obama Administration’s assertion that more money for the IRS would be an “investment” that would yield big returns.

But I want to be fair. Some of what the TAS does is worth applauding. The report also discusses the grotesque levels of complexity in the code. Here’s more of the Bloomberg story.

TAS IRS ComplexityThe U.S. tax system’s most serious problem is the 4-million-word code’s excessive complexity that makes it tough for taxpayers to comply with and difficult for the government to administer, National Taxpayer Advocate Nina Olson wrote in an annual report to Congress. The tax code cost taxpayers and businesses $168 billion in compliance in 2010… “Lowering rates in exchange for broadening the tax base would be an excellent bargain,” says the report, released today in Washington. “We are confident that in the end, public support for a simpler code will be strong and deep.”

The TAS also produced this very depressing infographic (click to enlarge). It’s absolutely disgraceful that complying with the tax code requires the equivalent of 3 million full-time workers. It’s a vast understatement to call this a counterproductive misallocation of labor.

Or how about the fact that just the guidance for the income tax, when printed out, creates a stack of paper more than 12 inches high? And what about the nauseating little tidbit that the tax code has been changed more than once per day since 2001?

No wonder it’s such a corrupt mess. Isn’t it time we rip up the entire tax code and put in place something simple and fair like a flat tax? Here’s my case for real tax reform.

By the way, I’m also more than willing to replace the tax code with a national sales tax, perhaps something like the Fair Tax. I’m given speeches, testified to Congress, appeared on TV, and done all sorts of things to promote that idea.

But the one huge caveat is that we need to make sure that the politicians don’t pull a bait and switch and stick us with both an income tax and national sales tax. Which is what happened in Europe when governments implemented the value-added tax without repealing income taxes.

That’s why we would first need to get rid of the income tax and repeal the 16th Amendment. But then, because I don’t trust the Supreme Court (gee, I wonder why?), I would also want to replace the 16th Amendment with new language that would be so ironclad that even Chief Justice John Roberts couldn’t fabricate reasons why an income tax could ever return to plague the nation.

But since we can’t even get the votes to approve a watered-down balanced budget amendment, I’m not holding my breath for the day that the Constitution is amended to permanently kill the income tax.

And that’s why I think the flat tax is a safer option.

The worst thing that happens if we get a flat tax is that politicians change their mind and we degenerate back to the current system.

The worst thing that happens if we get a national sales tax is that politicians “forget” to eliminate the income tax, we wind up with both, and become France.

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I used to think this image was a damning indictment of the internal revenue code. Or here’s another chart showing how the tax system has become more convoluted over time.

But this new image may be the most effective of all of them. We don’t know what’s in the other 72,000 pages of tax code, but we’re all familiar with the basic 1040 tax form. Look at what the politicians have done to it over the past several decades.

1040 Instruction graph

The only answer, needless to say, is to throw the entire mess in the trash can and replace it with a simple and fair flat tax.

Here’s my brief explanation of how the flat tax would work and why it’s a good idea.

Tax reform would give us more growth, but it also would reduce one of the major source of corruption in Washington.

It’s also based on the notion that discrimination is wrong and that class-warfare policy should be rejected.

So what’s not to like?

P.S. I always get a lot of email and comments from people who wonder whether we should adopt a national sales tax instead. That’s fine with me, for reasons I explain here, but you better make sure to first amend the Constitution so that scheming politicians don’t pull a bait-and-switch and saddle us with both an income tax and a sales tax.

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One of the principles of good tax policy and fundamental tax reform is that there should be no double taxation of income that is saved and invested. Such a policy promotes current consumption at the expense of future consumption, which is simply an econo-geek way of saying that it penalizes capital formation.

This isn’t very prudent or wise since every economic theory agrees that capital formation is key to long-run growth and higher living standards. Even Marxist and socialist theory is based on this notion (they want government to be in charge of investing, so they want to do the right thing in a very wrong way – think Solyndra on steroids).

To help explain this issue, the Wall Street Journal today published a very good primer on taxing capital gains.

The editors begin with an uncontroversial proposition.

The current Democratic obsession with raising the capital gains tax comes from a mistaken belief that the preferential rate applied to the sale of a family business, farm or financial asset is a “loophole” that mainly benefits the rich.

They offer three reasons why this view is wrong, starting with a basic inequity in the tax code.

Far from being a loophole, the low tax rate applied to capital gains is beneficial and fair for several reasons. First, under current tax rules, all gains from investments are fully taxed, but all losses are not fully deductible. This asymmetry is a disincentive to take risks. A lower tax rate helps to compensate for not being able to write-off capital losses.

Next, the editors highlight the unfairness of not letting investors take inflation into account when calculating capital gains. As explained in this video, this can lead to tax rates of more than 100 percent on real gains.

Second, capital gains aren’t adjusted for inflation, so the gains from a dollar invested in an enterprise over a long period of time are partly real and partly inflationary. It’s therefore possible for investors to pay a tax on “gains” that are illusory, which is another reason for the lower tax rate.

This may not seem like an important issue today, but just wait ’til Bernanke gets to QE24 and assets are rising in value solely because of inflation.

The final – and strongest argument – is that any capital gains tax is illegitimate because it is double taxation. I think this flowchart is very helpful for those who want to understand the issue, but the WSJ’s explanation is very good as well.

Third, since the U.S. also taxes businesses on profits when they are earned, the tax on the sale of a stock or a business is a double tax on the income of that business. When you buy a stock, its valuation is the discounted present value of the earnings. The main reason to tax capital investment at low rates is to encourage saving and investment. If someone buys a car or a yacht or a vacation, they don’t pay extra federal income tax. But if they save those dollars and invest them in the family business or in stock, wham, they are smacked with another round of tax.

There’s also good research to back up this theory – some produced by prominent leftists.

Many economists believe that the economically optimal tax on capital gains is zero. Mr. Obama’s first chief economic adviser, Larry Summers, wrote in the American Economic Review in 1981 that the elimination of capital income taxation “would have very substantial economic effects” and “might raise steady-state output by as much as 18 percent, and consumption by 16 percent.”

Summers is talking about more than just the capital gains tax, so his estimate is best viewed as the type of growth that might be possible with a flat tax that eliminated all double taxation.

Nobel laureate Robert Lucas also thinks that such a reform would have large beneficial effects.

Almost all economists agree—or at least used to agree—that keeping taxes low on investment is critical to economic growth, rising wages and job creation. A study by Nobel laureate Robert Lucas estimates that if the U.S. eliminated its capital gains and dividend taxes (which Mr. Obama also wants to increase), the capital stock of American plant and equipment would be twice as large. Over time this would grow the economy by trillions of dollars.

So why aren’t these reforms happening, either the medium-sized goal of getting rid of the capital gains tax, or the larger goal of junking the corrupt internal revenue code for a simple and fair flat tax?

A big obstacle is that too many politicians believe in class-warfare tax policy, even though lower-income people are among the biggest victims when the economy is weak.

For more information, here’s my video explaining that the right capital gains tax rate is zero.

P.S. Some of you may be wondering why I didn’t make a Laffer Curve argument for a lower capital gains tax. The main reason is because I have no interest in maximizing revenue for the government. I simply want good policy, which is why the rate should be zero.

P.P.S. I also didn’t bother to make a competitiveness argument, mostly because the WSJ’s editorial didn’t focus on that subtopic. But check out this post to see how Obama’s policy is putting America at a significant disadvantage.

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Everyone seems to agree that the Brits have a good sense of humor, and I think you’ll agree if you peruse this modern glossary of financial terms and this example of politically incorrect terrorism humor.

I was wondering whether their use of humor is a defense mechanism to endure the predations of statist politicians such as Gordon Brown and David Cameron.

But then why aren’t the French famous for humor considering they’ve had to deal with Sarkozy and Hollande?

So maybe there’s an alternative explanation for British humor. In any event, we can now add some tax humor to the list. I have no idea who Jeremy Kyle is, but I’m guessing an infamous moocher (sort of like America’s Diaper Man or Germany’s Footless Hans). The other dependents are self explanatory.

Quite clever, sort of like this letter defending drunken sailors from unfair and malicious comparisons.

At the risk of sounding chauvinistic, we do have some very good American tax humor, such as cartoons about the value-added tax that can be seen here, here and here.

There are also lots of jokes at the expense of the IRS, as you can see here, here, here, here, and here.

Also, I suspect this comedian has helped improve awareness of excessive taxation.

And everyone seems to like this beer-centric explanation of the tax system.

Last but not least, we also have the official cigarette of the Obama campaign, as well as cartoons here, here, here and here that mock the President’s class-warfare tax agenda.

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I’ve been fighting for more than 10 years to stop an IRS regulation that would force American banks to put foreign tax law above US tax law.

Sadly, I recently lost that battle when Treasury Secretary Tim Geithner finalized the third version of the regulation (it was first proposed by Clinton, and then a second version was put forth by the Bush White House).

In previous posts, I explained why this regulation represents bad tax policy and undermines the rule of law. I also have explained that it will hurt the American economy and why it endangers the human rights of people living under tyrannical and thuggish regimes.

But such concerns don’t matter to the tax cheat who is serving as the Treasury Secretary.

Richard Rahn is not happy about this outcome, either, and here is some of what he wrote in the Washington Times.

Over the past several years, Treasury Secretary Timothy F. Geithner was warned by many private economists and members of Congress of the adverse consequences of a proposed rule that would force U.S. banks to be uncompensated tax collectors for foreign governments. On April 17, Mr. Geithner issued the rule anyway. …To put it simply, the Obama Treasury Department and Internal Revenue Service (IRS) are forcing U.S. banks to report to foreign governments that often are corrupt or worse on lawful deposits their citizens hold in U.S. banks, thus putting those citizens’ lives at risk. As the former governor of Oklahoma and now president of the American Bankers Association, Frank Keating, wrote: “While the IRS minimizes potential security issues, nonresident aliens are unlikely to feel reassured by promises that their information won’t fall into the wrong hands. These pledges could be met with apprehension when countries with questionable human rights records remain on the recipient list. This rule gives nonresident aliens every incentive to pick up and move their deposits elsewhere.” …Looking at the actions and words of Mr. Geithner, you can conclude that he is consciously trying to destroy the U.S. economy, he lacks a sufficient number of brain cells and nerve connections for the job, or his ego and desire to pander to his boss and well-known economic illiterates has caused him to be willfully negligent over and over again. The latter is probably closest to the truth.

What makes this new regulation so disturbing is that it is a gross abuse of the regulatory process. For more than 90 years, Congress has maintained a policy of seeking to attract capital to the American financial system. Lawmakers repeatedly have looked at this issue of “nonresident alien” deposits, and they always have decided that America should be a safe haven for foreigners who want a good place to deposit money.

Yet the IRS, which is supposed to issue regulations that enforce existing law, proposed a regulation that overturns the law. And Geithner approved it. No vote from Congress. No legislation from the White House. No need to bother with the rule of law or democracy (and people wonder why there is rhetoric about a gangster government!).

I cover some of the key points in this video about the proposal.

You may be wondering why the Obama Administration is in favor of such a bad idea. Well, there’s no great mystery. Politicians get very upset if people have the freedom to shift economic activity to jurisdictions with better tax law. This process, known as tax competition, creates pressure for better tax policy.

Statists from all around the world have united in a campaign to undermine tax competition and expand the power of governments to impose bad tax policy. Obama and his team are simply doing their part to advance this dystopic vision.

The implementation of this IRS regulation means we’ve suffered an unfortunate defeat in this battle. So if we care about promoting good policy and restraining the greed of the political class, we need to redouble our efforts.

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I thought I despised the IRS, but I’m just an amateur. I’m in Geneva, Switzerland, where I just finished speaking to a group of overseas Americans who have steam coming out of their ears.

These folks are livid with the tax system, thanks to awful policies such as America’s worldwide tax regime and punitive laws such as FATCA.

So let’s ease the pain with some tax humor.

Losing an arm and a leg isn’t much fun, which reminds me that some Congressman (I think) had a very good idea of shifting election day so that it coincides with tax day. Not a bad idea, given the message of the cartoon.

And if you like tax humor, I recommend this IRS pencil sharpener. And for those who don’t mind PG-13 humor, there’s a good joke about the Rabbi and the IRS agent.

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I’m rather clueless on matters of popular culture, but I know the IRS is a vicious and needless bureaucracy that plagues the American people (though IRS agents could learn something from their Pakistani counterparts)

So I’m obviously a fan of this song that several people have sent me.

About a month ago, I made fun of the IRS for wanting to squander $15 million of our tax dollars on a PR campaign.  What’s great about this song is that it presumably is akin to a big PR campaign against the IRS jackboots.

And remember, while most of the blame for a terrible tax system should be directed against the clowns in Congress and the White House, the IRS goes above and beyond legislative requirements to hassle and torture Americans. Heck, sometimes it simply decides to ignore the law!

This video has some of the ugly details.

But let’s not end this post on a depressing note. Here’s some IRS humor to brighten your day, including the IRS version of the quadratic formula, a new Obama 1040 form, a list of tax day tips from David Letterman, a cartoon of how GPS would work if operated by the IRS, an IRS-designed pencil sharpener, two Obamacare/IRS cartoons (here and here), a sale on 1040-form toilet paper (a real product), a song about the tax agency, and (my favorite) a joke about a Rabbi and an IRS agent.

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Early in 2010, I wrote about a reprehensible IRS plan to create a cartel in the tax preparation industry, which would screw small firms and entrepreneurs to help line the pockets of big companies such as H&R Block.

And, earlier this year, I specifically criticized the IRS Commissioner for moving ahead with this scheme, which I also suspect is motivated by a desire on the part of the IRS to have a group of captive tax preparers who will be timid about protecting the interests of taxpayers.

With thuggish moves like that, no wonder the IRS wants to flush $15 million of our tax dollars down the toilet in a futile effort to improve its public image.

But there is some good news. The Institute for Justice has filed suit against the IRS for its disgusting behavior. This video explains.

One point from the video that should be emphasized is that the IRS is taking this step without any congressional authorization or instruction. But if you read this link about an IRS regulation that would force American banks to put foreign law above US law, you’ll know that the tax agency is capable of rogue behavior.

By the way, the Institute for Justice is a great organization that effectively fights for individual rights. Check out this IJ video on asset forfeiture laws (which basically enable stealing by the government).

And since we’re on the topic of theft by government, this IJ video on property rights, eminent domain, and the Kelo decision also is very much worth watching.

P.S. I’m not interested in protecting the interests of the tax preparation industry. Indeed, I want a simple and fair flat tax, which would decimate all tax preparation firms. But I don’t want the thugs at the IRS to decide which firms are allowed to operate.

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This interview with the IRS Commissioner is really irritating. He wants us to believe that all the problems exist because of bad laws enacted by Congress.

I certainly agree that the crowd in Washington is venal, corrupt, and duplicitous. But the IRS takes a bad situation and makes it worse, whether we’re looking at gross abuses of the regulatory process or absurd proposals to squander money on a P.R. campaign to make the agency more cuddly.

So I’m less than overwhelmed by this performance.

Commissioner Shulman also makes reference to a distasteful IRS proposal to regulate the tax preparation industry, which is really a scheme to enrich the big firms like H&R Block at the expense of smaller competitors.

So that’s another black mark against the bureaucracy.

But the most noxious part of the interview is when he admits he has to pay someone to file his tax return and then dodges a question on what could be done to make the system better.

But that’s not surprising. Mr. Shulman oversees a bureaucracy with about 100,000 employees (bigger than the FBI, CIA, and DEA combined), and they obviously wouldn’t want the type of reform that would force them to get jobs in the real world.

But I don’t have any problem with telling the truth. America should have a simple and fair flat tax.

Actually, that’s just an interim step. What we really need is to restore a limited central government, as envisioned by the Founding Fathers. That way we wouldn’t need any broad-based tax to finance Washington.

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The overwhelming fiscal policy challenge for America is entitlement programs, as I explain in this set of videos. To protect America from becoming another Greece, we need personal retirement accounts for Social Security. We need vouchers for Medicare. And we need to block-grant Medicaid back to the states.

Real reform can give people more security and save taxpayers by reducing the burden of government spending by trillions of dollars over the next several decades.

But sometimes it is the comparatively tiny bits of spending that effectively illustrate the waste, stupidity, and venality of big government. Lets talk about how the Internal Revenue Service (IRS) is squandering $15 million in a way that should drive taxpayers ballistic with rage.

Here are some disturbing details from the Wall Street Journal report.

The nation’s tax collector wants a “full service communications and marketing company” to help convey its “corporate vision and goals,” according to a 49-page solicitation sent to 12 agencies. The winner’s duties could include market research, educating the public about new tax provisions, and designing national information campaigns. The one-year contract could be extended for four more years, with a total value of as much as $15 million, the IRS solicitation says. PR firm Porter Novelli has had the contract for four years, but it reached the $17.5 million limit, IRS spokesman Terry Lemons said. …The IRS has relied on Porter Novelli to help inform taxpayers about some new laws and programs. Porter Novelli confirmed that the firm works with the IRS, but declined to comment further. Public relations experts said it would be an attractive challenge, given the agency’s unpopularity. …PR types said it’s technically possible to think of tougher marketing challenges — but not many. “Advancing the interests of the North Korean leadership at the moment would be harder than the IRS,” suggested Matthew Harrington.

Isn’t it wonderful that the IRS isn’t as despised as the North Korean dictatorship! I guess that’s because the North Korean government will sometimes kill you or starve you to death. The IRS, by contrast, only steals your money and occasionally gets you tossed in prison.

To show that I’m a public-spirited person, I’m going to save taxpayers $15 million by giving the IRS two good pieces of advice.

1) Obey the Constitution, which means respecting the presumption of innocence and following the Fourth Amendment’s guidelines about illegal search and seizure. I realize that complicates the job of enforcing a terrible tax code, but the Constitution exists precisely because the Founding Fathers thought some things were more important than “efficient” government.

2) Urge your overseers in the U.S. Congress to junk the internal revenue code and replace it with a simple and fair flat tax. The video below provides a simple explanation.

See how simple that was. No need to throw $15 million down the toilet of some politically connected PR firm.

Enjoy the video.

And here’s another video documenting the onerous compliance burden of the current system and explaining how that flat tax would de-fang the IRS.

Seems like such a good idea that only people who benefit from the current system would be opposed. Unfortunately, that describes the political class, upon which we’re relying to get such reforms.

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Leftists want higher tax rates and they want greater tax compliance. But they have a hard time understanding that those goals are inconsistent.

Simply stated, people respond to incentives. When tax rates are punitive, folks earn and report less taxable income, and vice-versa.

In a previous post, I quoted an article from the International Monetary Fund, which unambiguously concluded that high tax burdens are the main reason people don’t fully comply with tax regimes.

Macroeconomic and microeconomic modeling studies based on data for several countries suggest that the major driving forces behind the size and growth of the shadow economy are an increasing burden of tax and social security payments… The bigger the difference between the total cost of labor in the official economy and the after-tax earnings from work, the greater the incentive for employers and employees to avoid this difference and participate in the shadow economy. …Several studies have found strong evidence that the tax regime influences the shadow economy.

Indeed, it’s worth noting that international studies find that the jurisdictions with the highest rates of tax compliance are the ones with reasonable tax systems, such as Hong Kong, Switzerland, and Singapore.

Now there’s a new study confirming these findings. Authored by two economists, one from the University of Wisconsin and the other from Jacksonville University, the new research cites the impact of tax burdens as well as other key variables.

Here are some key findings from the study.

According to the results provided in Table 2, the coefficient on the average effective federal income tax variable (AET) is positive in all three estimates and statistically significant for the overall study periods (1960-2008) at beyond the five percent level and statistically significant at the one percent level for the two sub-periods (1970-2007 and 1980-2008). Thus, as expected, the higher the average effective federal income tax rate, the greater the expected benefits of tax evasion may be and hence the greater the extent of that income tax evasion. This finding is consistent with most previous studies of income tax evasion using official data… In all three estimates, [the audit variable] exhibits the expected negative sign; however, in all three estimates it fails to be statistically significant at the five percent level. Indeed, these three coefficients are statistically significant at barely the 10 percent level. Thus it appears the audit rate (AUDIT) variable, of an in itself, may not be viewed as a strong deterrent to federal personal income taxation [evasion].

Translating from economic jargon, the study concludes that higher tax burdens lead to more evasion. Statists usually claim that this can be addressed by giving the IRS more power, but the researchers found that audit rates have a very weak effect.

The obvious conclusion, as I’ve noted before, is that lower tax rates and tax reform are the best way to improve tax compliance – not more power for the IRS.

Incidentally, this new study also finds that evasion increases when the unemployment rate increases. Given his proposals for higher tax rates and his poor track record on jobs, it almost makes one think Obama is trying to set a record for tax evasion.

The study also finds that dissatisfaction with government is correlated with tax evasion. And since Obama’s White House has been wasting money on corrupt green energy programs and a failed stimulus, that also suggests that the Administration wants more tax evasion.

Indeed, this last finding is consistent with some research from the Bank of Italy that I cited in 2010.

…the coefficient of public spending inefficiency remains negative and highly significant. …We find that tax morale is higher when the taxpayer perceives and observes that the government is efficient; that is, it provides a fair output with respect to the revenues.

And I imagine that “tax morale” in the United States is further undermined by an internal revenue code that has metastasized into a 72,000-page monstrosity of corruption and sleaze.

On the other hand, tax evasion apparently is correlated with real per-capita gross domestic product. And since the economy has suffered from anemic performance over the past three years, that blows a hole in the conspiratorial theory that Obama wants more evasion.

All joking aside, I’m sure the President wants more tax compliance and more prosperity. And since I’m a nice guy, I’m going to help him out. Mr. President, this video outlines a plan that would achieve both of those goals.

Given his class-warfare rhetoric, I’m not holding my breath in anticipation that he will follow my sage advice.

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I’ve written several times about a proposed IRS regulation that would force American banks to put foreign law above U.S. law. I’ve repeatedly warned that the scheme, which would force financial institutions to report the deposit interest they pay to foreigners, is bad economic policy, bad regulatory policy, and bad banking policy.

My arguments have included:

But these points don’t seem to matter to the Obama Administration, which is ideologically committed to the anti-tax competition agenda of Europe’s welfare states. This is why the White House supports all sorts of destructive policies, including not only this misguided regulation, but also the creation of something akin to a world tax organization that will have power to block free-market tax policy.

A new article in the Weekly Standard explains what’s at stake.

Early last year the Treasury Department published its “Guidance on Reporting Interest Paid to Nonresident Aliens,” which would require banks to report to the Internal Revenue Service the interest paid to foreign depositors with a U.S. bank account. While the Treasury and the regulatory apparatus insist that the cost and inconvenience of adhering to this regulation is next to nothing, the rule may cost the U.S. banking system hundreds of billions of dollars in lost deposits, in turn costing our economy billions of dollars, while providing no discernible benefit to banks, depositors, taxpayers, or the U.S. economy. …a much bigger problem—for banks and the economy—than the compliance costs is the threat of a massive capital flight. The United States is a very popular place for foreigners to park their savings, for a variety of reasons. For starters, we offer a stable government that can be trusted to keep its hands off deposits—something that appeals greatly to residents of Venezuela, Argentina, Ecuador, and any number of other unstable countries. …As a result, a staggeringly large amount of savings from abroad is currently held in U.S banks. While the Treasury asserts that “deposits held by nonresident alien individuals are a very small percentage of the [total] deposits held by U.S. financial institutions,” that very small percentage amounts to more than $3.7 trillion, according to a 2011 Bureau of Economic Analysis report, hardly a pittance. The massive amount of foreign savings here is a boon to the U.S. economy. Banks lend against these deposits, mainly to companies here in the United States. Jay Cochran, an economist at George Mason University, studied the impact that the more limited 2002 reporting requirements would have had on the banking system, estimating that it would have resulted in nearly $100 billion in deposits leaving the U.S. banking system. A reporting regulation that covers all foreign accounts would likely result in two to three times more capital flight. The impact would be harmful not just for the banks but for the broader economy. The decline in profits in the banking sector alone from a roughly quarter-trillion-dollar capital flight would be in the range of $5-10 billion—which makes a mockery of the notion that the costs of the regulation are under $100,000.

For more information about this wretched proposal, here’s a video I narrated on the topic.

To put it bluntly, the Obama Administration is pushing this regulation because it thinks the anti-tax competition agenda of Europe’s welfare states is so important that it is willing to risk the health of the American economy, undermine the soundness of U.S. financial institutions, disregard the rule of law, and abuse the regulatory process.

Indeed, this proposal is even worse than the increasingly infamous Foreign Account Tax Compliance Act.

And that’s saying something, because with each passing day, it is more and more obvious that FATCA is a destructive law that will significantly harm the American economy. But at least it’s a law, one that was approved by Congress and signed by the President. And the costly FATCA regulations being developed by the IRS are for the purpose of enforcing the law.

The interest-reporting IRS regulation is also costly and destructive, to be sure, but what makes it so perverse is that it is – at best – completely gratuitous. It is being advanced solely for reasons of ideology, regardless of the law and consequences be damned.

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As this image illustrates, the internal revenue code is a nightmare of complexity.

And this chart shows how Obamacare is turning the health care system into a Byzantine nightmare.

So what happens when you mix bad tax policy and bad health care policy? Well, you get this chart, which shows the maze that small business owners must navigate in order to comply with a new Obamacare tax credit.

Maybe this cartoon was right after all.

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