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Archive for the ‘IRS’ Category

When I criticize America’s wretched tax code (now slightly less worse because of the recent tax bill), I generally focus my ire on the politicians who have spent more than 100 years creating an insanely complicated and convoluted system.

The Internal Revenue Service, by contrast, is simply the bureaucracy that is charged with enforcing the code.

But that doesn’t mean the IRS should escape criticism. The bureaucrats have some leeway and that discretion sometimes gets abused. The most glaring example in recent years was the agency’s despicable attempt to tilt the political playing field and influence elections by discriminating against Tea Party groups.

Yet not everyone thinks the IRS misbehaved. The Washington Post actually published an editorial that tries to portray the IRS as a victim. Seriously. I’m not joking.

Conservatives who long sought to restrain the Internal Revenue Service have managed to throw a wrench into an IRS division that is supposed to regulate tax-exempt nonprofits and charities, just at a time when these groups are becoming more partisan and complex. …The number of applications from new charities has exploded in recent years, and the law is a bit of a gray zone — vaguely written and hard to enforce. In recent years, overwhelmed by applications, the…division seems to have lost its will to scrutinize charities. According to Mr. O’Harrow, last year the division rejected just 37 of the 79,582 applications on which it made a final determination. He reported that charities have now begun to recognize they face little or no chance of examination or sanction. The division’s budget has declined from a peak of $102 million in 2011 to $82 million last year. The number of division employees has fallen from 889 to 642.

I have a modest bit of sympathy for the IRS. As the editorial notes, the tax code is “vaguely written and hard to enforce.”

But my solution is to remove IRS discretion. In the long run, that can happen with a simple and fair flat tax that does away with the deduction for charitable contributions and thus removes any need for monitoring and enforcement.

In the short run, the easy answer is that charitable status should be automatic and the 642 bureaucrats should concentrate on finding and punishing nonprofit groups that violate the law.

But here’s the part of the editorial that is delusional.

…the division and its then-leader, Lois Lerner, fell into the crosshairs of the conservative tea party movement for the slow pace of approvals of tea party groups, which they claimed was due to a conspiracy by the Obama administration to target them. Subsequent investigations found mismanagement — the IRS was taking shortcuts and using keywords to deal with the mountain of applications — but not deliberate targeting.

Wow. I wonder if the person who wrote this editorial is ignorant or mendacious. The IRS admitted that it targeted Tea Party groups! The bias was in the keywords.

And that wasn’t even the first time the Post tried to make excuses for the IRS.

Investor’s Business Daily opined on this issue over the summer.

This is one of the most serious abuses of power by a federal agency in decades. That no one really lost a job and no one has been prosecuted for abusing the powers of the federal government to harass groups for their political beliefs — the kind of thing routinely done in places such as Russia and Venezuela, not in the U.S. — is nothing less than shocking. For those who need a reminder and without getting too deep in the weeds, the scandal involves IRS bureaucrats denying tax-exempt status to groups apparently solely due to their conservative political beliefs. This is clearly highly illegal. … the Nonprofit Quarterly…notes that…”Various congressional committees attempted to ferret out what happened and who did it but were stymied by the IRS’ slow responses to records requests and, in some cases, destruction of computer media (that) might have contained important information.” In short, it looks like a classic case of a gross violation of federal law followed by a possibly criminal cover-up. …This is unconscionable behavior by a federal agency that is governed by that very same Constitution.

Amen.

This is why I agreed with George Will about the impeachment of the IRS Commissioner and also argued in favor of budgetary consequences for the agency.

Sadly, the Trump Administration has basically gone to bat for the IRS when it should be pushing for transparency and reform.

By the way, my complaints about the IRS go way beyond the fact that the bureaucrats persecuted the Tea Party.

Let’s look at a recent story about a dodgy contract the IRS recently issued.

The IRS will pay Equifax $7.25 million to verify taxpayer identities and help prevent fraud under a no-bid contract issued last week, even as lawmakers lash the embattled company about a massive security breach that exposed personal information of as many as 145.5 million Americans. A contract award for Equifax’s data services was posted to the Federal Business Opportunities database Sept. 30 — the final day of the fiscal year. …The notice describes the contract as a “sole source order,” meaning Equifax is the only company deemed capable of providing the service.

What mostly bothers me is not that the IRS gave a contract to a company that had just suffered a major data leak. Instead, I’m very suspicious about it being a no-bid contract issued on the last day of the fiscal year.

Sounds like the bureaucrats had some use-it-or-lose-it funds and they decided to screw taxpayers.

And here’s another story that’s worth sharing.

Internal Revenue Service (IRS) employees have backed Democrats over Republicans by 2-1 in their political donations over the last 25 years. Donors listing the IRS as their employer have donated roughly $453,800 to Democratic candidates and causes and $221,400 to Republican candidates and causes since 1990. About one in four of the dollars for Democrats, or roughly $117,500, went to President Barack Obama. But IRS employees since 1990 have also donated $203,000 to the National Treasury Employees Union, which in turn has given about 95 percent of its $6 million in political contributions to Democrats over the last 25 years, OpenSecrets.org data shows. Disclosure of the huge bias among IRS employees for Democrats won’t help an agency under fire for years for illegally targeting conservative groups applying for tax-exempt status.

To be sure, bureaucrats can give political contributions and remain honest and fair in their dealings with the public.

Nonetheless, I suspect Lois Lerner wasn’t the only partisan hack who tried to interfere with the political process.

Let’s now end where we started. The Washington Post editorial implied that the IRS deserved a bigger budget and more staff so bureaucrats could investigate each application.

I’ve already explained why that’s not the right approach from a compliance perspective, but there’s also a moral argument against further expanding the IRS budget (something Republicans sadly don’t understand).

P.S. The IRS awarded itself “performance bonuses” after the scandal.

P.P.S. I also thought it was remarkable that IRS bureaucrats wanted to be exempt from Obamacare while asking for more money to enforce fines on ordinary people who didn’t sign up.

P.P.P.S. I’ve certainly done my part to explain why the IRS bureaucracy deserves scorn.

P.P.P.P.S. I don’t want to end on a sour note, so here are examples of IRS humor from my archives, including a new Obama 1040 form, a death tax cartoon, a list of tax day tips from David Letterman, a Reason video, 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 collection of IRS jokes, 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 realize that we’re in the midst of an important tax battle in Washington and that I should probably be writing about likely amendments to the Senate tax bill.

But long-time readers know that I’m bizarrely preoccupied by international tax issues (I would argue for very good reasons since global tax competition is a way to discipline greedy politicians and because I want the power of governments to be constrained by national borders).

So I can’t resist commenting on a Washington Post story about the tax implications of the upcoming wedding of Prince Harry and Meghan Markle.

It may seem like a modern fairy tale, but the upcoming wedding of Britain’s Prince Harry to American actress Meghan Markle will come with some mundane hurdles. Perhaps most inconveniently for the British royals, this transatlantic partnership could end up involving the United States’ Internal Revenue Service.

Most readers probably wonder how and why the IRS will be involved. After all, Ms. Markle no longer will be living in the United States or earning income in the United States after she marries the Prince.

But here’s the bad news (for the millions of Americans who live overseas, not just Ms. Markle): The United States imposes “worldwide taxation,” which means the IRS claims the right to tax all income earned by citizens, even if those citizens live overseas and earn all their income outside of America.

…there already has been widespread speculation that the union of Prince Harry and Markle eventually could result in some British royal children wielding American passports. But there’s a big obstacle in the way: American tax laws. …The United States’ citizenship-based taxation system is unusual: Only Eritrea has a similar system. It’s a relic of the Civil War and the Revenue Act of 1862, which called for the taxing of U.S. citizens abroad.

Here’s what this means for the royal family.

Markle’s American citizenship could open up the secretive finances of the royal family to outside scrutiny. If she remains a U.S. citizen, Markle will have to file her taxes to the IRS every year. And if she has more than $300,000 in assets at any point during the tax year — a likely scenario, given her successful acting career and her future husband — she will be expected to annually file a document called Form 8938 that will reveal the detail of these assets, which could include foreign trusts. …Although Markle’s tax information would not become public once sent to the United States, it would leave the royal family open not only to IRS review but also the risk that the information could leak, said Dianne Mehany, a tax lawyer at Caplin & Drysdale.

So what’s the solution if the royal family wants to avoid the greedy and intrusive IRS?

Ms. Markle will need to copy thousands of other overseas Americans and renounce her citizenship.

…the royal family employs some of the country’s best tax consultants. …”My guess is that she’ll be pressured by the Royal family to renounce [her U.S. citizenship], even if she’d rather not,” Spiro added. In many ways, that solution may be the simplest. And if Markle does give up her citizenship, she won’t be alone. Treasury Department data show that 5,411 people chose to expatriate in 2016 — a 26 percent year-over-year increase and potentially a historic high — and experts expect that number to keep rising because of the increasing tax burdens placed on U.S. citizens living abroad.

And it’s embarrassing to acknowledge that the United States has a very barbaric practice (used by evil regimes such as Nazi Germany and Soviet Russia) of extorting funds from Americas who are forced to give up citizenship.

She…would be subject to a potentially considerable exit tax.

This is adding injury to injury.

But Ms. Markle can be comforted by the fact that she’s not an outlier. Because of America’s bad worldwide tax regime (and especially because of FATCA, which makes enforcement of that bad system especially painful), an ever-growing number of overseas Americans have been forced to give up their citizenship.

Maybe as a wedding present to Prince Harry, American politicians can junk America’s terrible worldwide tax regime. That doesn’t require dramatic change, but why not fix a bunch of problems at once? I’ll simply point out that the flat tax is based on the common-sense approach of territorial taxation (governments only tax economic activity inside national borders).

P.S. This issue also impacts America’s Olympic athletes.

P.P.S. And Santa Claus as well!

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Whether I like what’s happening (getting rid of Operation Choke Point) or don’t like what’s happening (expanding civil asset forfeiture), it appears that the Justice Department under Attorney General Jeff Sessions is willing to make decisions.

With one very puzzling exception.

No steps have been taken to reverse the Obama-era policy of stonewalling to hide evidence of IRS scandals. Everything seems to be on auto-pilot.

The Wall Street Journal opined about the issue today and is justifiably frustrated.

The Obama Justice Department dismissed the IRS political targeting scandal as no big deal, and the Trump Administration hasn’t been any better. …These are basic questions of political accountability, even if the IRS has stonewalled since 2013. President Obama continued to spin that the targeting was the result of some “boneheaded” IRS line officers in Cincinnati who didn’t understand tax law. Yet Congressional investigations have uncovered clear evidence that the targeting was ordered and directed out of Washington. Former director of Exempt Organizations Lois Lerner was at the center of that Washington effort, but the IRS allowed her to retire with benefits. She invoked the Fifth Amendment before Congress. One of her principal deputies, Holly Paz, has submitted to a deposition in separate litigation, but the judge has sealed her testimony after she claimed she faced threats. The Acting Commissioner of the IRS at the time, Stephen Miller, stepped down in the wake of the scandal, but as far as anyone outside the IRS knows, no other IRS employee has been held to account. Even if the culprits were “rogue employees,” as the IRS claims, the public deserves to know what happened. …The Trump Administration also has a duty to provide some answers. The Justice Department and IRS have continued to resist the lawsuits as doggedly as they did in the Obama era. Attorney General Jeff Sessions can change that… Seven years is too long to wait for answers over abuses of the government’s taxing power.

This is spot on. It’s outrageous that the Obama Administration weaponized and politicized the IRS. But it’s also absurdly incompetent that the Trump Administration isn’t cleaning up the mess.

I understand why the bureaucrats at the Justice Department instinctively (and probably ideologically) want to protect their counterparts at the IRS. But, as the WSJ stated, there’s no reason why Attorney General Sessions isn’t using his authority to change policy.

The President’s failure to fire the ethically tainted IRS Commissioner is a troubling sign that the problem isn’t limited to the Justice Department.

One of Republicans’ least favorite Obama administration officials remains in his position: IRS Commissioner John Koskinen. Some Republicans lawmakers have asked President Trump to ask for Koskinen’s resignation. The commissioner’s term expires in November, but he has said he would step aside sooner if asked by the president. …Koskinen to lead the IRS in 2013, not long after it was revealed that the agency had subjected Tea Party groups’ applications for tax-exempt status to extra scrutiny and delays. …Many Republicans accuse Koskinen of impeding congressional investigations into the political-targeting scandal. They argue that he made false and misleading statements under oath and didn’t comply with a subpoena. During the last months of Obama’s presidency, some House Republicans pushed for a vote on Koskinen’s impeachment… Since Trump has taken office, there have been calls from GOP lawmakers for Koskinen to step down. Days after Trump’s inauguration, Republican Study Committee (RSC) Chairman Mark Walker (R-N.C.) and more than 50 other lawmakers sent a letter urging Trump to fire Koskinen “in the most expedient manner practicable.” …It’s unclear why Trump hasn’t ousted Koskinen or if he plans to do so in the future.

Very disappointing. I’m not a fan of conspiracy theories, but this almost leads me to wonder whether Koskinen has some damaging information on Trump.

Incidentally, the Justice Department may be dragging its feet and the White House may have cold feet, but the Treasury Department is overtly on the wrong side. And the problem starts at the top, resulting in praise for the Treasury Secretary from the pro-IRS forces at the New York Times.

President Trump’s Treasury secretary, Steven Mnuchin, knows that investing in the Internal Revenue Service yields significant returns… And he’s right: Every dollar spent on the agency returns $4 in revenue for the federal government, and as much as $10 when invested in enforcement activities. …At his confirmation hearings in January, Mr. Mnuchin bemoaned the cuts to the I.R.S. budget over the last seven years. The agency “is under-resourced to perform its duties,” he said, adding that further cuts “will indeed hamper our ability to collect revenue.” He also acknowledged that money spent on the I.R.S. is a good investment: “To the extent that we add resources, we can collect more money.” …his faith in the I.R.S. work force prompted one of his congressional interrogators to call it “refreshing” to hear someone “praise the employees at the Treasury Department.”

Yet should we give more money to a bureaucracy that has a big enough budget to finance this kind of reprehensible behavior?

The Internal Revenue Service has seized millions of dollars in cash from individuals and businesses that obtained the money legally, according to a new Treasury Department inspector general’s report. …individuals and businesses are required to report all bank deposits greater than $10,000 to federal authorities. Intentionally splitting up large sums of cash into sub-$10,000 amounts to avoid that reporting requirement is known as “structuring” and is illegal under the federal Bank Secrecy Act. But many business owners engaged in perfectly legal activities may be unaware of the law. Others are covered by insurance policies that don’t cover cash losses greater than $10,000. Still others simply want to avoid extra paperwork, and keep their deposits less than $10,000 on the advice of bank employees or colleagues. …The reporting requirements were enacted to detect serious criminal activity, such as drug dealing and terrorism.

I’m very skeptical that these intrusive anti-money laundering laws are successful by any metric, but I’m nauseated that the main effect is to give IRS bureaucrats carte blanche to steal money from law-abiding people.

The IRS pursued hundreds of cases from 2012 to 2015 on suspicion of structuring, but with no indications of connections to any criminal activity. Simply depositing cash in sums of less than $10,000 was all that it took to arouse agents’ suspicions, leading to the eventual seizure and forfeiture of millions of dollars in cash from people not otherwise suspected of criminal activity. The IG took a random sample of 278 IRS forfeiture actions in cases where structuring was the primary basis for seizure. The report found that in 91 percent of those cases, the individuals and business had obtained their money legally.

But here’s the part that’s most outrageous.

Innocent people weren’t the byproducts of a campaign to get bad guys. They were the targets.

…the report found that the pattern of seizures — targeting businesses that had obtained their money legally — was deliberate. “One of the reasons why legal source cases were pursued was that the Department of Justice had encouraged task forces to engage in ‘quick hits,’ where property was more quickly seized and more quickly resolved through negotiation, rather than pursuing cases with other criminal activity (such as drug trafficking and money laundering), which are more time-consuming,” according to the news release. In most cases, the report found, agents followed a protocol of “seize first, ask questions later.” Agents only questioned individuals and business owners after they had already seized their money.

In any event, the Trump Administration’s failure to deal with the problem seems to have emboldened the tax collection agency.

Despite promises to Congress, the Internal Revenue Service has yet to take advantage of a red-flag alert system designed to prevent it  from rehiring past employees with blots on their records, a watchdog found. …the Treasury Inspector General for Tax Administration found that more than 200 of 2,000-plus former employees “whom the IRS rehired between January 2015 and March 2016 had been previously terminated or separated from the tax agency while under investigation,” according to a report released on Thursday.

And keep in mind that IRS bureaucrats awarded themselves big bonuses in response to the scandal.

By the way, the problem isn’t limited to the executive branch.

Republicans in 2015 (after they had control of both the House and Senate!) decided that the best response to IRS scandals was to increase the agency’s budget. I’m not joking (and I’m also not happy). At the risk of being redundant, only the Stupid Party could be that stupid.

I sarcastically wrote four years ago that we should be thankful that Obama reminded the American people that the IRS isn’t trustworthy. Little did I realize that Republicans would fumble a golden opportunity to deal with the mess once they got power.

P.S. I’ve certainly done my part to explain why the IRS bureaucracy deserves scorn.

P.P.S. I don’t want to end on a sour note, so here’s more examples of IRS humor from my archives, 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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It’s that time of year. Those of us who wait until the last minute are rushing to get tax returns filed (or extensions submitted).

So it’s also a good time to remind ourselves that there is a better way.

Economists look at the tax system and focus on the warts that undermine growth.

Other people focus on the immorality of the tax code.

Most of these problems have existed for decades and are familiar to people who have the misfortune of working for tax reform.

But every so often, policy wonks like me get surprised because we find out that things are even worse than we thought.

For instance, here are some excerpts from a very disturbing article in The Hill about the IRS’s we-don’t-care attitude about fraudulent use of Social Security numbers.

…illegal immigrants…use other people’s social security numbers (SSNs) to get jobs and then file their taxes with their IRS-issued Individual Taxpayer Identification Numbers (ITINs). Although the tax returns contain false W-2 information, the IRS continues to process them, and the agency does not notify the people whose SSNs were used. …Koskinen said that in such cases “it’s in everybody’s interest to have them pay the taxes they owe.” …Rep. Dave Brat (R-Va.)…told The Hill on Friday that he was “shocked” and “horrified” by Koskinen’s response. …House Freedom Caucus Chairman Jim Jordan (R-Ohio)…said Friday that Koskinen’s comments about illegal immigrants’ tax returns are “just one more example of why Koskinen is doing such a poor job and should be impeached.”

As a quick aside, I’d be very curious to get some confirmation about Commissioner Koskinen’s assertion that illegals are net taxpayers. I wouldn’t be surprised to learn instead that they are a net drain because of “earned income tax credit,” which is a form of redistribution that gets laundered through the tax code.

But setting that aside, it’s completely outrageous that the IRS doesn’t let taxpayers know that their Social Security numbers have been stolen.

Congressman Jordan (and George Will) are right. There should be consequences for a government official who treats taxpayers with contempt.

Though Koskinen does deserve some credit for honesty about tax reform, as reported by the Washington Free Beacon.

IRS Commissioner John Koskinen told lawmakers on Wednesday that implementing a flat tax would be simpler than the current tax system and would save the agency a lot of money. …Rep. Blaine Luetkemeyer (R., Mo.) asked Koskinen whether a flat tax policy would save the agency money. …”clearly if you had a two-page form or a one-page form where you got rid of all the deductions and everything else and people just paid…a flat tax…it would be simpler for taxpayers and it would be much simpler for us,” Koskinen said. …Luetkemeyer asked Koskinen for more specifics about how much of the IRS’ current budget of $11.2 billion could be saved if a flat tax were implemented. “…it would be a lot,” Koskinen said. “It’d clearly be a sea change, a difference in the way the place operates.”

To call the flat tax “a sea change” is an understatement. As explained in this video, research from the Tax Foundation shows that the compliance burden of the tax code would fall by more than 90 percent.

And the economy would grow much faster since a key principle of the flat tax is that revenue should be collected in the least-damaging manner.

Though if you’re worried that a flat tax is too timid and you would prefer no broad-based tax for Washington, Mark Perry of the American Enterprise Institute shared this wonderful image.

Which is why October 3, 1913 may be the worst day in American history.

Some people claim that it would be impossible to have a modern society without an income tax.

Well, the Cayman Islands, Bermuda, and Monaco are very modern, and all those jurisdictions enjoy great prosperity in large part because there is no income tax.

And we could enjoy the same freedom and prosperity in the United States. But only if we reduced the size of the public sector.

In other words, we could free ourselves of the income tax if we could somehow get rid of all the programs that were created once the income tax gave politicians a big new source of tax revenue.

The challenge is convincing politicians to give up their ability to buy votes with other people’s money.

Incidentally, this is why we should be stalwart in our opposition to the value-added tax. The experience with the income tax shows that politicians will expand the burden of government spending if they obtain any significant new source of revenue.

Let’s close with a somewhat amusing look at how tax compliance works in India. Here are some blurbs from a story in the Wall Street Journal.

For five years, real-estate developer Prahul Sawant ignored government orders to pay his taxes. Then the drummers showed up, beating their instruments and demanding he cough up the cash. Neighbors leaned out windows and gawked. Within hours, a red-faced Mr. Sawant had written a $945 check to settle his long-standing arrears. Shame is the name of the game as India’s local governments try new tools to collect taxes from reluctant citizens. …Thane’s municipal commissioner, Sanjeev Jaiswal, is resorting to public embarrassment of tax scofflaws. …Since the drummers started work early this year in this suburb of Indian commercial capital Mumbai, property-tax revenue has jumped 20%, said Mr. Jaiswal.

It’s also safer for the tax bureaucrats to rely on drummers.

Tax collectors in Vitawa-Kalwa are glad the drummers, and some security officers, are touring the neighborhood with them. “When the staff show up to collect tax alone, people get angry and beat them up,” said S.R. Patole, the assistant commissioner, who is responsible for revenue in the area.

And if drummers don’t work, the municipal commissioner has a back-up plan.

Mr. Jaiswal…plans to deploy groups of transgender women, known in India as hijras, to perform mocking dances to shame tax delinquents. Hijras are widely believed to be able to impose hexes.

I’ll have to add this story to my collection of “great moments in tax enforcement.”

For what it’s worth, I’m on the side of the taxpayers because of the Indian government’s legendary ability to waste money.

P.S. If you’re a late filer and need some humor to get through the day, here’s my collection of IRS-related jokes: 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 a big fan of Estonia.

According to both the Fraser Institute and the Heritage Foundation, it has considerable economic freedom.

It has a low-rate flat tax, meaning that investors, entrepreneurs, and small-business owners aren’t punished for contributing more to the nation’s economic output.

It responded to the 2008 crisis by cutting spending rather than engaging in a Keynesian spending binge (which also led to an exploding cigar for Paul Krugman).

Now I have another reason to like Estonia.

It’s a role model for how to reduce corruption by shrinking the size and scope of government.

First, some background.

Neil Abrams and Professor Steven Fish have a column in the Washington Post about the seemingly intractable problem of boosting the rule of law in developing and transition economies.

Western aid agencies and scholars agree that the rule of law is required before developing countries can reduce poverty and corruption. For decades, they have supported aid programs designed to help developing countries establish law-based states. …In a rule-of-law state, the rules apply even to the rulers, not just the ordinary folks. The rule of law is not the same as democracy. Scores of developing countries have demonstrated that establishing democracy is the easy part. The rule of law is harder to attain. From India and the Philippines to Argentina, democracy coexists with endemic corruption, and elites remain largely exempt from the rules.

They then explain that its well-nigh impossible to create the rule of law in a society that has a big government.

…our research suggests that they have the sequence backward. Before urging governments to adopt the rule of law, they must first advise reformers to take one key step: eliminating the government subsidies that sustain criminal elites and replacing the compromised bureaucrats who patronize them.

Now for the big takeaway from their column: Estonia is the role model for how this can happen.

Our research shows that a few good policies can pave the way for the rule of law. For instance, Estonia’s clean and capable state administration represents a model of post-communist success. But this was not always the case. In 1991, when communism collapsed, Estonia, like other post-Soviet countries, had almost no working institutions and a burgeoning class of economic predators, nor was Estonia economically privileged. In the early post-Soviet years, its income per capita was only 10 to 20 percent higher than that of Russia and Romania and 20 to 30 percent lower than that of Croatia, Slovakia and Hungary. But Estonian leaders acted boldly. …early Estonian governments ended practically all subsidies to state and private enterprises. …in developing countries, state subsidies almost always benefit corrupt elites more than ordinary people. This policy cut off the budding economic criminals who profit from state largesse rather than entrepreneurial aptitude — and made it possible for real entrepreneurs to thrive. Deprived of subsidies, old-guard enterprise directors and crony capitalists could not muster enough political influence to hold governments hostage.

Sadly, other nations are not copying Estonia, in part because the international bureaucracies and national agencies that dispense foreign aid don’t support policies to shrink government in recipient nations.

Unfortunately, Estonia is the exception and not the rule. That’s  not for lack of trying on the part of the West. The United States, the European Union, the World Bank, the European Bank for Reconstruction and Development and the United Nations have spent billions of dollars for the express purpose of helping countries build a rule of law. …But they’re stumbling. The Western effort assumes that the rule of law will flourish only if developing countries receive enough education, guidance, training and money. In fact, a growing body of research throws such optimism into doubt.

In other words, foreign aid – at best – is useless. And it may be harmful by financing a bigger role for recipient governments.

The authors close by emphasizing the need (assuming genuine rule of law is the goal) to prune the bureaucracy and public sector.

Scholars often treat the rule of law as a prerequisite for market-oriented economic policies such as liberalizing prices and trade and eradicating wasteful subsidies. They’re getting it backward. Instead, first eliminate the subsidies and purge the compromised bureaucrats who stand in the rule of law’s way. This is hard to do. It will provoke tremendous resistance from those who profit from the status quo. But it’s far more realistic and effective than simply encouraging countries to adopt the rule of law.

So what are the implications of this analysis for the United States?

Given that America now ranks below Estonia for rule of law, and given that rule of law is gradually eroding in the United States, the obvious lesson is that the public sector in America needs to shrink.

The real challenge, though, is convincing politicians to give up power.

Professor Glenn Reynolds of the University of Tennessee Law School explains in USA Today that a larger government is good for politicians because it creates opportunities for graft.

The explanation for why politicians don’t do all sorts of reasonable-sounding things usually boils down to “insufficient opportunities for graft.” And, conversely, the reason why politicians choose to do many of the things that they do is … you guessed it, sufficient opportunities for graft. That graft may come in the form of bags of cash, or shady real-estate deals, or “consulting” gigs for a brother-in-law or child, but it may also come in broader terms of political support.

Glenn notes that there’s an entire school of thought in economics that analyzes this unfortunate tendency of politicians to conspire with interest groups at the expense of taxpayers and consumers.

…there’s a whole field of economics based on this view, called “Public Choice Economics.” Nobel prize winning economist James Buchanan referred to public choice economics as “politics without romance.” Instead of being selfless civil servants motivated solely by the public good, public choice economics assumes that politicians are, like other human beings, heavily influenced by self-interest. …You pick a car because it’s the best car for you that you can afford. Politicians pick policies because they’re the best policies — for them — that they can achieve. …the entire system is designed — by politicians, naturally — to make it harder for voters to keep track of what politicians are doing. The people who have a bigger stake in things — the real estate developers or construction unions — have an incentive to keep track of things, and to influence them.

Having received my Ph.D. from George Mason University, home of the Center for the Study of Public Choice, I echo Glenn’s comments about the value of this theory.

So what’s the moral of the story?

As summarized by Professor Reynolds, bigger government means more corruption and smaller government means less corruption.

The more the government does and the more decisions that are relegated to bureaucrats, “guidance” and other forms of decisionmaking that are far from the public eye, the more freedom politicians have to pursue their own interest at the expense of the public — all while, of course, claiming to do just the opposite.

Now let’s look at some real-world examples from Washington.

By the way, I’m not writing to specifically condemn Obama and his team, even though I’m quite confident that the Chicago machine produces people who excel at unethical behavior.

Republicans also get their hands dirty by steering undeserved wealth to special interests, as explained here, here, and here.

That being said, most Washington corruption today seems associated with the Democrat Party for the simple reason that Democrats control the bureaucracy.

For instance, here are some of the key points from a New York Times report.

The State Department, under Secretary Hillary Rodham Clinton, created an arrangement for her longtime aide and confidante Huma Abedin to work for private clients as a consultant while serving as a top adviser in the department. Ms. Abedin did not disclose the arrangement — or how much income she earned — on her financial report. It requires officials to make public any significant sources of income.

To be blunt, this stinks to high heaven.

…the picture that emerges from interviews and records suggests a situation where the lines were blurred between Ms. Abedin’s work in the high echelons of one of the government’s most sensitive executive departments and her role as a Clinton family insider. While continuing her work at the State Department, in the latter half of 2012, she also worked for Teneo, a strategic consulting firm, which was founded by Doug Band, a former adviser to President Bill Clinton. Teneo has advised corporate clients like Coca-Cola and MF Global, the collapsed brokerage firm run by Jon S. Corzine, a former governor of New Jersey.

The Daily Caller also has been doing some first-rate work on the cronyism and corruption inside Washington.

One of their stories, for instance, exposed the left-wing connections of the supposedly “apolitical” bureaucrat at the heart of the IRS scandal.

IRS Exempt Organizations Division director Lois G. Lerner, who has been described as “apolitical” in mainstream press coverage of the IRS scandal, is married to tax attorney Michael R. Miles, a partner at the law firm Sutherland Asbill & Brennan.

And why does that matter?

The 400-attorney firm hosted an organizing meeting at its Atlanta office for people interested in helping with voter registration for the Obama re-election campaign. …Lerner personally signed the tax-exemption approval for a shady charity run by Obama’s half-brother, after an inexplicably brief one-month application process.

Time to wrap this up.

I enjoy Mark Steyn for his biting humor, but he makes a very serious and relevant point is his latest column.

A civil “civil service” requires small government. Once government is ensnared in every aspect of life a bureaucracy grows increasingly capricious. The U.S. tax code ought to be an abomination to any free society, but the American people have become reconciled to it because of a complex web of so-called exemptions that massively empower the vast shadow state of the permanent bureaucracy. Under a simple tax system, your income is a legitimate tax issue. Under the IRS, everything is a legitimate tax issue: The books you read, the friends you recommend them to. There are no correct answers, only approved answers.

I made a similar point, arguing that you can’t have a competent government unless it’s a small government.

But as the public sector expands, effective management becomes much harder.

And, as discussed in an interview with John Stossel, you also get corruption, mixed with incompetence and thuggery.

Let’s close by re-issuing my video explaining how big government enables pervasive corruption. It’s never been more timely and appropriate.

P.S. There are some countries with big governments that are not plagued by corruption. The Nordic nations, for instance, rank at or near the top in many economic indications, including high-quality rule of law. Though it’s worth noting that these jurisdictions scored highly in these areas before the burden of government was expanded.

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The good thing about being nonpartisan is that I can freely criticize (or even praise) policy makers without giving any thought to whether they have an R or D after their name.

That doesn’t mean Republicans and Democrats are the same, at least with regards to rhetoric. The two big political parties in the United States ostensibly have some core beliefs. And because of that, it is sometimes very revealing to identify deviations.

Democrats supposedly believe the rich should pay higher taxes and that low-tax jurisdictions should be persecuted, yet many Democrat bigwigs utilize tax havens.

Republicans supposedly believe in smaller government, yet many of them decide to get rich by lobbying to expand the size and scope of Washington.

Democrats supposedly believe there’s a big gender pay gap, but Obama’s top economic adviser said such numbers are fake and Hillary gave higher pay to men in her office.

Let’s now add to the list.

The IRS has stonewalled and treated Congress with contempt. The bureaucrats have disregarded the law to advance Obama’s hard-left agenda. They have used their power to help Obama’s reelection campaign. And IRS employees even donate lots of money to Democrats.

Given all this, you would think Republicans would be doing everything possible to punish this rogue bureaucracy. Even if only because of self interest rather than principles.

Yet GOPers decided, as part of their capitulation on spending caps (again!), to boost the IRS’s budget. I’m not joking. The Hill has a report with the sordid details.

The spending bill…provides an increase in funding to the Internal Revenue Service, a rare win for an agency that has been on the outs with congressional Republicans. The $1.1 trillion omnibus provides an additional $290 million for the IRS, an increase of 3 percent over the last fiscal year.

What’s especially discouraging is that Congress was on track to reduce the IRS’s bloated budget.

…the outcome for the IRS in the omnibus could have been far worse. A bill advanced by the House Appropriations Committee earlier this year that would have slashed IRS funding by $838 million, while a bill passed by the Senate Appropriations Committee would have reduced funding by $470 million. Instead, the spending package gives the IRS a nearly $300 million bump.

This is yet another piece of evidence that budget deals crafted behind closed doors inevitably produce bad numbers and bad policy.

And it’s certainly another sign that Republicans truly are the Stupid Party.

Just in case you think I’m being unfair to either GOPers or the IRS, let’s look at some recent developments. Here are the best parts of an editorial on unseemly IRS behavior from the Washington Examiner.

President Obama’s IRS repeatedly los[es] hard drives loaded with data related to scandals at the agency. To lose one might be regarded as suspicious happenstance; to lose two looks like conspiracy. The most famous case is that of Lois Lerner, whose division became notorious for targeting conservative groups applying for nonprofit status. Her computer hard drive malfunctioned before that scandal broke, around the same time Congress was looking for information on a separate IRS targeting scheme aimed at conservative donors. …The newest case of IRS hard drive trouble happened last April, but came to light only this month. …the IRS has notified the Justice Department that it erased a hard drive after being ordered not to do so by a federal judge. In this case, the missing communications are those of a former IRS official named Samuel Maruca in the Large Business and International division. He is believed to have been among the senior IRS employees who made the unusual and possibly illegal decision in May 2014 to hire the outside law firm Quinn Emanuel to help conduct an audit of Microsoft Corporation.

And here’s some shocking (or maybe not so shocking) information from the Daily Caller. The IRS’s new ethics chief (wow, there’s an oxymoron) has a track record of illegally destroying records.

The new head of the Internal Revenue Service’s (IRS) ethics office once oversaw the illegal shredding of documents sought by the federal tax agency’s inspector general (IG), and allegedly retaliated on the colleague he believed snitched on him about it.

Yup, he sounds like the kind of guy who deserves a bigger budget.

Let’s close with some very good advice from the Washington Examiner.

In the nearly three years since the targeting scandal was revealed, it has become clear that it was just a symptom of a much deeper problem at the IRS — a culture that lacks accountability, rewards failure, and persecutes the innocent. …it needs a thorough housecleaning, not…bonuses.

Too bad Republicans decided the entire IRS deserved a big bonus.

P.S. From my archives, here are some examples of the bureaucrats who will benefit from a bigger IRS budget.

P.P.P.S. And since we’re recycling some oldies but goodies, here’s my collection of 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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When someone says “IRS,” my Pavlovian response is “flat tax.”

That’s because I’m a policy wonk and I’d like to replace our punitive internal revenue code with something simple and fair that doesn’t do nearly as much damage to our economy.

And it’s a fringe benefit that real tax reform would substantially de-fang the IRS.

But I’m also a big believer in the rule of law and a big opponent of capricious government power, so I’m also interested in curtailing the power of the IRS even if we don’t get a chance to fix the tax code.

I’ve previously commented on the unseemly and corrupt behavior of the IRS, and there’s no question the bureaucracy’s actions have been despicable.

But is it so bad that the Commissioner of the IRS deserves to be impeached? Let’s look at pro and con arguments.

Here’s some of what Bloomberg’s Al Hunt wrote about the controversy. He’s obviously a defender of the current Commissioner.

The specifics of any supposed impeachable offenses are vague. Koskinen, 76, is a respected, successful business and government executive who, at the behest of the White House, took on the job of cleaning up the beleaguered tax agency in December 2013, after offenses had been committed. …The accusations stem from 2013, when the IRS’s tax-exempt division was found to have disproportionately targeted conservative groups for scrutiny. Although Koskinen was brought in after the damage had been done, …Some, rather recklessly, accuse him of lying. …The specific charges seem specious: There may have been miscommunication, but there is no evidence of wrongdoing by Koskinen. …The pre-Koskinen abuses by the IRS’s tax-exempt division have been the subject of three inquiries… All were critical of IRS mismanagement, but none found any evidence of illegal activities or political direction from on high.

George Will is not so sanguine about Koskinen’s role. Here are excerpts from his column in the Washington Post.

Federal officials can be impeached for dereliction of duty (as in Koskinen’s failure to disclose the disappearance of e-mails germane to a congressional investigation); for failure to comply (as in Koskinen’s noncompliance with a preservation order pertaining to an investigation); and for breach of trust (as in Koskinen’s refusal to testify accurately and keep promises made to Congress). …After Koskinen complained about the high cost in time and money involved in the search, employees at a West Virginia data center told a Treasury Department official that no one asked for backup tapes of Lerner’s e-mails. Subpoenaed documents, including 422 tapes potentially containing 24,000 Lerner e-mails, were destroyed. For four months, Koskinen kept from Congress information about Lerner’s elusive e-mails. He testified under oath that he had “confirmed” that none of the tapes could be recovered. …Koskinen’s obfuscating testimonies have impeded investigation of unsavory practices, including the IRS’s sharing, potentially in violation of tax privacy laws, up to 1.25 million pages of confidential tax documents. …Koskinen consistently mischaracterized the Government Accountability Office report on IRS practices pertaining to IRS audits of tax-exempt status to groups.

These charges don’t seem (as Hunt asserted) to be “specious.”

That doesn’t mean, by the way, that there aren’t good (or at least adequate) responses to these accusations.

And perhaps Koskinen didn’t technically commit perjury. Maybe he simply engaged in some Clintonian parsing and misdirection.

So I’ll be the first to admit that it’s unclear whether Koskinen deserves to be impeached.

But I’ll also be the first to argue that the IRS is a rogue bureaucracy that needs to slapped down. That’s why it deserves budget cuts rather than the increases favored by the White House.

And Lois Lerner almost certainly should be in jail. Beyond that, I’m open to ideas on how to discourage the tax collectors from engaging in rampant misbehavior.

Just in case you think I’m exaggerating, here’s a list.

These horror stories provide plenty of evidence that the internal revenue service should have its wings clipped.

P.S. Since we’re criticizing the IRS, I can’t resist sharing some oldies but goodies.

P.P.P.S. And since I’m digging through my archives, here’s my collection of 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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