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American politicians and tax bureaucrats often say that the United States has the most effective income tax system in the world - because the extent of voluntary compliance by American taxpayers far exceeds that of any other nation. Many societies view taxation as a contest between tax collectors and citizens, with payment or avoiding payment of taxes as the prize. But we are different, they say, because Americans voluntarily, that is, willingly, file tax returns and pay their taxes.
In a pig’s eye!
If that’s true, why do we hear so much about the taxes that are not being paid by people who work or do business in the “underground economy”? Wikipedia observes that estimates of the unreported commercial activity in the U.S. amount to as much as one trillion dollars a year. And, the IRS Oversight Board report for fiscal year 2007 notes that the tax gap, “the difference between what is owed and what is collected . . . is estimated at $345 billion of lost revenue annually.”
Would you file a tax return if you were not afraid of the consequences of not filing?
Putting aside the government’s hype and PR efforts, the reason our income tax system is so successful is FEAR. Fear of being audited, fear of being assessed, fear of tactics employed to collect unpaid taxes, fear of intrusion into our personal affairs, fear of not being able to defend ourselves against the unlimited power of the government in general and the IRS in particular.
I believe the Internal Revenue Service (IRS) has carefully cultivated this image over a period of many years. Who can say that they don’t have a sudden, albeit perhaps brief, fearful reaction when they find a letter or notice from the IRS in their mail? I know I do, and I’m a retired CPA. I don’t want to hear from them, ever! When I get some sort of notice from my friendly tax agency I just know it’s going to cost me time, money and aggravation. Perhaps you’ve noticed over the years that around tax time it’s common to see a spate of media stories about prosecutions for tax fraud. In my opinion, that’s no accident.
Beyond that, the IRS has a reputation for harassing and intimidating taxpayers, often seizing their assets, otherwise destroying them financially and hounding them into bankruptcy. Stories about IRS abuses of power have been legion for years, many of which are well founded.
In the late 90s, Congressional hearings that were held to look into IRS abuses produced a flood of testimony about the agency’s mistreatment of taxpayers, some of which was given by witnesses who were so fearful of testifying against the IRS that their identities were hidden.
Jeff Schnepper, a former professor of taxation, accounting and finance and author of Inside the IRS, How it Works (You Over), details many examples of IRS abuses of the rights of taxpayers. “What is frightening about these stories,” he said, “is that in no case did the agents of the Internal Revenue Service exceed their legitimate authority. In each instance, the then-current revenue statutes shielded their actions.”
Schnepper also noted that many tax professionals feel that the powers of the IRS exceed constitutional limits and that, at times, they “even violate due process provisions and the Fifth Amendment protection against self-incrimination.”
The Internal Revenue Service has more power over the nation’s citizens than any other government agency. Perhaps the most widely abused aspect of IRS power is the “Jeopardy Assessment,” a device that was created by the IRS itself, through its own administrative orders.
Jeopardy assessments enable the agency to bypass its own rules to collect whatever money an IRS auditor claims may be owed by a taxpayer. The initial “jeopardy” determination is made by an IRS district director’s administrative decree, without any judicial review.
The theory behind these assessments is that they merely accelerate the date taxes are due, making taxes that would normally be payable in the future due today. It results in an immediate lien on all property owned by the taxpayer upon notice and demand for payment. In some cases, such as employment and wagering taxes, the IRS doesn’t even need to send a “notice of deficiency” to the taxpayer before seizing his property.
You may wonder how they can do this when they don’t know how much is owed? The answer is quite simple. They make it up. It’s called an estimate.
One incident reported to a subcommittee of the Senate Finance Committee in 1975 illustrates how it works: A French citizen, who was a passenger on a flight to Switzerland, was carrying $247,500 with him, which was discovered when the plane landed in New York. An IRS agent, who did not know whether the Frenchman had earned any income in the United States, nonetheless levied a Jeopardy Assessment of $247,500 against the man when he refused to answer certain questions. The agent testified that he had been instructed to prepare a return showing a tax due of approximately $247,500 and that he had done so. He admitted that the cost of living figure he had used was a pure fiction.
Why was the $247,500 figure picked? Because that’s how much cash the Frenchman was carrying with him on the airplane.
Once the IRS issues a Jeopardy Assessment, it gives the agency broad powers over the property of the taxpayer. In many cases, these summary proceedings can deprive the taxpayer of the ability to continue in business, pay living expenses, or even hire an attorney for defense purposes.
Jeopardy assessments are intended for cases in which the IRS believes a taxpayer might leave the country, remove or transfer his property, conceal himself or his possessions, or do anything else that might “frustrate (or jeopardize) collection of the tax.” Traditionally, they have been used as major weapons in the fight against organized crime, specifically gambling and narcotics. But they have been misused.
There has been a lot of talk over the years about drastically revamping or eliminating the nation’s income tax system, including getting rid of the Internal Revenue Service. Many people feel this is long overdue, while others believe such a dramatic change is far too drastic and favor a general overhaul of the existing tax laws. Putting aside the issue of how much money is realistically needed to operate the government and its many and varied programs, the basic question seems to be whether the current tax system can be sufficiently reformed to better serve our society’s needs or if it should simply be scrapped altogether and replaced with another form of taxation.
Contrary to the commonly held view that political discourse today is more unpleasant and ugly than ever, the roots of nasty politics date back to the earliest campaigns in American history.
Joseph Cummins book “Anything for a Vote: Dirty Tricks, Cheap Shots, and October Surprises,” chronicles the history of nasty politics since George Washington’s election in 1789. A 2007 New York Times interview of Mr. Cummins noted the following observations about dirty political campaigns, among others:
“I think the mudslinging definitely is still a big part of our election process, but it’s less broad and vulgar. For instance, there is less aimed at other people’s physical attributes. The 19th century was big on that…Martin Van Buren was accused of wearing women’s corsets (by Davy Crockett, no less) and James Buchanan (who had a congenital condition that caused his head to tilt to the left) was accused of have unsuccessfully tried to hang himself. Oh, and Abraham Lincoln reportedly had stinky feet.”
In response to the question, “What was the ugliest campaign in history?, Cummins commented: “So many dirty elections, so little time…There have been stolen elections (the Rutherford Hayes – Samuel Tilden contest in 1876 was certainly stolen by Republicans in the South…I would say that 1964 was the ugliest presidential contest I have researched. President Lyndon Johnson, seeking his first elective term after taking over for the assassinated JFK, set out not just to defeat Goldwater, but to destroy him and create a huge mandate for himself…They put out a Goldwater joke book, in which your little one could happily color pictures of Goldwater dressed in the robes of the Ku Klux Klan…This committee also wrote letters to columnist Ann Landers purporting to be from ordinary citizens terrified of the prospect of a Goldwater presidency…But perhaps the ugliest things about the 1964 election was Johnson’s treatment of the press. He remarked to an aide that ‘reporters are puppets,’ and had his people feed them misleading information about the Goldwater campaign.”
After the 19th Amendment was passed, “there was an immediate attempt to pander to women voters in 1920, the first year that women began casting their votes for president in large numbers.”
“Both parties at different times in American history have been guilty of mind-boggling attempts to influence elections. In the 1880s, one of the worst decades in terms of dirty tricks, Republicans sent bagmen to Indiana – then a pivotal state – with hundreds of thousands of dollars in two dollar bills (dubbed ‘Soapy Sams’ for their ability to grease palms) in order to purchase votes.”
Totallytop10.com, noting that negative political campaign ads and smears go back many decades, lists the following 10 most negative political campaign ads in U.S. and Canadian history. Whether these are the most negative ads may be arguable, but they are instructive as examples:
During the presidential primaries in 2007, the three a.m. White House Phone Call ad, in which a Hillary Clinton TV ad portrayed her as being more qualified on military and defense matters than Barack Obama.
The Willie Horton political ad in 1988, which implied that Michael Dukakis was soft on crime. Horton assaulted a couple and severely raped a woman during one of several weekend passes he received while in prison.
During the presidential primaries in 2007, John McCain compared Obama with Paris Hilton and Britney Spears, claiming that Obama appeared to be more interested in international fame than serving the country as president.
In 1980, when he was running for governor of Ohio, Jerry Springer admitted that he had paid prostitutes for sex some years earlier.
The campaign ad “The wrong kind – congressman Ron Kind.”
In Canada, the Conservative Progressive party ran an ad that attacked Prime Minister Jean Chretien by focusing on physical defects he was said to have.
In the Canadian federal election, candidate Stephanie Dion was shown being pooped on by an animated puffin.
In the 1964 American presidential election, the “daisy girl” commercial warned that if Barry Goldwater were elected he would use the H-bomb and start a war that would destroy America.
The political ad in the 1800 presidential campaign, Jefferson vs John Adams, arguing that “If Jefferson would be president today we could expect pure evil.”
Dating back to the 1840s, dirty tricks have also played an important role in American politics. Following the Civil War, they became nastier, when, in 1880, a New York scandal sheet published a letter that was purported to have been written by James Garfield to the head of the employers Union of Lynn, Massachusetts, endorsing the right of corporations to hire the cheapest labor available, including Chinese workers. The letter was a forgery, but it almost derailed Garfield’s campaign until he was able to prove that he had not written it.
It’s not unusual to think that nasty political discourse is worse today than ever before, but the record clearly demonstrates that dirty politics has been with us since the beginning of the nation.
As with all things, in political campaigning, the more things change the more they stay the same.
A friend recently told me that he can’t stand listening to or watching the news on T.V. any longer, because discussions about politics have become so unpleasant. The constant bickering, name calling and argumentative exchanges have turned him off. He also made the observation that he couldn’t understand the apparent hostility about political issues today, that he doesn’t remember it ever being so extreme. To give you a sense of his perspective, he is a Vietnam veteran in his early sixties.
His complaint set me to thinking about the tone of political discourse in general and whether it is really any worse today than it has been at other times in our history.
A little research turned up some interesting but perhaps not surprising information about ugly political campaigns throughout America’s history. For example, neatorama.com, cites five examples of nasty politics took place in the following presidential contests: Thomas Jefferson vs John Adams in 1800, Andrew Jackson vs John Quincy Adams in 1828, Abraham Lincoln vs Stephen Douglas in 1860, Grover Cleveland vs James G. Blaine in 1884 and Herbert Hoover vs Al Smith in 1928.
In 1800, Jefferson hired someone to write insults about John Adams, one of which was that Adams was a “hideous hermaphroditical character which has neither the force and firmness of a man, nor the gentleness and sensibility of a woman.” This may seem tame compared to political insults today, but it was extremely insulting in its time.
Adams responded with “Are you prepared to see your dwellings in flames…female chastity violated…children writhing on the pike? Great God of compassion and justice, shield my country from destruction.” Sounds a little like the political volleying about national security that’s taking place today between Obama and his opponents, doesn’t it?
In the campaign of 1828, John Quincy Adams and his handlers accused Andrew Jackson of having the personality of a dictator, claimed that he was too uneducated (misspelled Europe), and leveled terrible insults at Jackson’s wife, who had been in an abusive marriage with a man who divorced her, which was considered a scandal at the time. She was called a “dirty black wench,” “a convicted adulteress” who engaged in “open and notorious lewdness.”
Jackson’s supporters responded that Adams had sold his wife’s maid as a concubine to the Czar of Russia.
In 1860, Stephen Douglas said that Abe Lincoln was a “horrid-looking wretch, sooty and scoundrelly in aspect, a cross between the nutmeg dealer, the horse-swapper and the nightman.” He also stated, “Lincoln is the leanest, lankiest, most ungainly mass of legs and arms and hatchet face ever strung on a single frame.”
Lincoln’s campaign responded with taunts about Douglas’ height, referring to him as Little Giant (he was only 5’4”)…said “to be five feet nothing in height and about the same in diameter the other way.”
Grover Cleveland was characterized as lecherous during his 1884 campaign against James G. Blaine. In fact, Cleveland had fathered a child with a widow, which probably wouldn’t amount to much by today’s political standards, however, the chant, “Ma! Ma! Where’s my pa?” was used to taunt candidate Cleveland at the time.
On the other side, Blaine was accused of corruption in his dealings with a railroad, which was confirmed in a letter he wrote, admitting that he knew about the dishonesty and instructing the person to whom the letter was written to “Burn this letter! Burn this letter!”
Democrat Al Smith lost to Herbert Hoover in 1928 largely due to an attack on Smith’s Catholic religious affiliation, which asserted that he had commissioned a 3,500 mile tunnel from the Holland Tunnel in New York to the Vatican in Rome and that the Pope would influence all presidential decisions if Smith were elected.
This concern resurfaced during the 1960 presidential campaign, in which a generally unspoken but widespread fear circulated that if John Fitzgerald Kennedy were elected he would allow his policies to be dictated by the Vatican.
In addition to nasty political discourse dating back to 1800, dirty political tricks in America first appeared as early as 1844, when a phony newspaper story was planted by the head of the Whigs, claiming that James Polk’s salves were branded with his initials, allegedly proving that the candidate sold slaves to finance his campaign. The Whigs also printed phony ballots that confused the names of Democratic and Whig electors, which was intended to mislead voters.
We tend to view current events through the prism of today’s standards, but as ugly as we may think political contests are today, it’s worth noting that they are not regulated by Marquis of Queensbury Rules, that, in politics, anything goes, always has and always will.
As the saying goes, “All’s fair in love and war.” I would modify this adage to read: “All’s fair in love, war and politics.”
Continuing with my annual tax season observations about taxation in America, following are some additional random facts (in no particular order), along with some of my conclusions about our income tax laws, who pays, who doesn’t, and the impacts our system of taxation have on the nation’s productivity:
Households in the lowest 20% of income received about $8.21 in federal, state and local government spending for every dollar of taxes paid (in 2004), while those in the top 20% received only 41 cents in benefits. (Tax Foundation Working Paper No. 1, March 2007).
There are 1,890 forms files are available on the IRS website, IRS.gov. The easiest federal income tax form, the 1040EZ, has 33 pages of instructions.
The IRS distributes 8 billion pages of forms and instructions annually. End-to-end, they would encompass the earth 28 times.
Approximately 60% of taxpayers hire a professional to have their tax returns prepared each year.
Income taxes consume over 38% of the average family’s income, which is more than they spend for food, shelter and clothing combined.
The top ten states that have the highest percentage of people who do not pay taxes are (in descending order): Mississippi (43%), Louisiana (43%), Arkansas (40%), New Mexico (38%), Alabama (37%), Texas (37%), Montana (36%), Oklahoma (36%), South Carolina (36%) and Georgia (36%).
Our tax laws have become so complex and contradictory that no one, not even the most brilliant tax professionals, including IRS experts, fully understand them.
It’s worth noting, I think, that when I started practicing public accounting in the early 1960s, the filing deadline was March 15, not April 15, and only one 90-day extension was permitted. Today, the due date for filing is April 15, and it is possible to obtain a six-month extension - to October 15 - primarily because of the increased difficulty of obtaining the necessary information and the complexity of preparing and filing tax returns.
Many societies view taxation as a contest between tax collectors and citizens, with payment or avoiding payment of taxes as the prize. But we are different we are told, because Americans voluntarily, that is, willingly, file tax returns and pay their taxes.
Baloney! If that’s true, why do we hear so much about taxes not being paid by people who work or do business in the “underground economy”? Would you file a tax return if you were not afraid of the consequences of not filing?
Putting aside the government’s hype and PR initiatives, the reason our income tax system is so successful is FEAR. Fear of being audited, fear of being assessed, fear of tactics employed to collect unpaid taxes, fear of intrusion into our personal affairs, fear of not being able to defend ourselves against the unlimited power of government in general and the IRS in particular.
I believe the IRS has carefully cultivated this image over a period of many years. Who can say that they don’t have a sudden, albeit perhaps brief, fearful reaction when they find a letter or notice from the IRS in their mail? I know I do, and I’m a retired CPA. I don’t want to hear from them, ever! When I do get some sort of communication from my friendly tax agency (federal or state), I just know it’s going to cost me time, money and aggravation. Perhaps you’ve noticed over the years that around tax time it’s common to see a spate of media stories about prosecutions for tax fraud. In my opinion, that’s no accident.
One of Ronald Reagan’s many sage observations sums up the situation rather neatly: “The taxpayer: That’s someone who works for the federal government but doesn’t have to take the civil service examination.” For my part, I believe Americans are over-taxed and under served by their government, while our politicians are constantly looking for ways to impose new taxes under the radar of public scrutiny and awareness. Will it ever end? Probably not, until we have allowed ourselves to be taxed into near or complete oblivion.
Another year of tax season agony has begun, and it’s time to make my annual observations about taxation in America.
Following are some random facts (in no particular order) about our income tax laws, who pays, who doesn’t, and the impacts our system of taxation has on the nation’s productivity:
When the 16th Amendment to the Constitution established the federal income tax in 1913, the intent was to tax only the very rich. Rates began at 1% and increased to 7% for taxpayers with income in excess of $500,000. Less than 1% of the population paid any income tax at all, compared with almost 50% of taxpayers paying as much as 35% of their taxable income today.
The federal tax code grew from 14 pages in 1913 to over 9,000 pages today, and it now requires some 66,000 pages to document all the IRS regulations and other source material.
The Tax Foundation’s 2007 survey reported that 83 percent of Americans felt the income tax code was too complex. While the average American paid 32.4 percent of their income on taxes, they believed the total of federal, state and local taxes should not exceed 14.7 percent.
It’s almost impossible to accurately comply with the federal tax law, no matter how honest and well-intentioned taxpayers may be. In 1998 there were 34 million civil penalties assessed by the IRS.
Today, the top 5% of wage earners pay a little over 54% of total individual income taxes, while the top 10% pay about 60%, and the top 50% pay approximately 97%. Translation: Just half of all taxpayers pay almost 100% (96.54%) of all income taxes, while almost 50% pay no income taxes at all.
The Internal Revenue Service (IRS) has approximately 94,000 employees (FTEs or full-time equivalents) and a total 2010 budget of $12.4 billion.
Estimates of unreported commercial activity in the U.S. amount to between $2.0 and $2.25 trillion dollars a year, and the IRS Oversight Board report for fiscal 2007 notes that the tax gap, “the difference between what is owed and what is collected…is estimated at $600 billion of lost revenue annually.” Question: If it’s an underground economy, how does anyone know how much income is not reported?
The Tax Foundation reported that businesses and individuals now waste over 6.6 billion hours on federal tax compliance activities each year, at an estimated cost to taxpayers of $368.4 billion in 2010. That amounts to a 22.8% surcharge on the total amount collected through the tax system and is equivalent to over three million people working full time, just to deal with tax compliance.
In 1913, when the sixteenth amendment was passed, the federal tax code was comprised of 1,337 words. Today, according to the Tax Lawyers Blog, it now requires over seven million words to document.
When the General Electric Co. filed the corporation’s tax return electronically, it took 24,000 pages to document. The Associated Press (June 1, 2006) noted, “If GE had sent paper forms, the return would have staked up eight feet high…”
In 1993, the General Accounting Office (GAO) audited the IRS for the first time in its history and found widespread evidence of financial malfeasance and gross negligence, including the fact that the agency was not able to account for 64% of its congressional appropriation.
The Alternative Minimum Tax (AMT) “was created in 1969 to target 21 – yes, 21 – millionaires who had managed to avoid paying any taxes at all.” (Wall Street Journal, April 14, 2007). “… more than three million taxpayers (were)…hit by the Alternative Minimum Tax on the(ir) 2006 income. The next year (2007) that number could have increased to 23 million except that Congress passed a so-called “patch” to prevent it.
The federal income tax, currently as high as 35% of taxable income, is increased by as much as 11% in state and local income taxes, plus another 6.20% and 1.45% in social security and Medicare taxes, which makes the total tax burden for some taxpayers almost 54%, not including excise, sales and property taxes, along with a host of other taxes, assessments and fees to numerous to mention. Medieval serfs were required to give only one-third of their production to the lord of the manor, and they were considered slaves.
The latest question being debated in the media is, “Can we kill an American who is working for al Qaeda overseas?” It may be rhetorical, but it clearly demonstrates the confusion in America today about our status, that is, whether we are at war or not?
The nation is divided over the issue. If we are at war, why aren’t we trying war criminals in military tribunals as opposed to giving them the same rights that our citizens enjoy in civilian courts?
The Bush administration seemed to be clear that we are at war, and that enemy combatants should be tried in military courts. However, although Guantanamo Bay was established as the place to hold people who were picked up on the battlefield or otherwise captured and known to be terrorists, such as Khalid Sheikh Mohammad, in the eight years following the World Trade Center attack, the government never completed the job of updating our laws to deal with such prisoners.
Most of the public seems to believe we are at war and that it is a war on terrorism. However, the Obama administration apparently does not agree.
This leads to confusion and weakens our nation’s defenses. Obama’s position that the word “terrorism” is not to be used by his administration and being unwilling to acknowledge that we are at war is directly at odds with his authorization to send an additional 30,000 troops to Afghanistan and his approval of attacks by military drones in both Afghanistan and Pakistan.
The confusion is further exemplified by the administration’s handling of incidents like the Fort Hood shooting, promising to close Gitmo without thoroughly considering the consequences, and moving the trials of Khalid Sheik Mohammad and the Christmas Day bomber to civilian courts. For the most part, the reasoning behind these decisions is not clear and the public appears to strongly object to them.
Article One, Section Eight of the U.S. Constitution says, “Congress shall have power to…declare War,” so perhaps the question should be, “Why not declare war al Qaeda and any other group that attacks us?”
We seem to be overlooking the fact that Osama bin Laden declared war on the United States in August 1996. His declaration was published in a London based Arabic language newspaper and followed a long list of attacks on U.S. properties and personnel overseas dating back to 1979, when Iran took U.S. embassy employees hostage. It continued from there with the 1983 attack on the Marine barracks in Lebanon and a succession of other attacks thereafter, the most notable of which were the attacks on the World Trade Center in September 2001 and the attempt to bomb a Northwest Airlines flight from Copenhagen to Detroit on Christmas day 2009.
So, what’s the problem? Are we at war or not? And, if we are, why don’t we formally declare war and move on from there? The obvious question is, “against whom?” There is no easy answer to this, but how about starting with al Qaeda and any nation or group that gives them support or allows them to use their territory for training and staging attacks on other nations?
As for declaring war, that’s the province of Congress, not the president, so why not move the process directly to the legislature where the issue can be openly debated, regardless of what the president may want? Ultimately, the decision is up to them, not him.
My guess is that the American people would strongly favor debating and settling this issue once and for all. We should eliminate any confusion about holding enemy combatants until the war ends and trying them in military tribunals or civilian courts, or killing an American who is openly waging war against his own country.
I know it’s a complicated and confusing issue, but no more than many others that are taken up by Congress. Let them get everything out on the table for all to see and discuss, then decide – so we can go forward with a clear understanding of the alternatives, good and bad, which hopefully would unify the nation behind a single, clear-cut policy.
The problem with the current situation is that it allows our enemies, al Qaeda, Muslim fundamentalists and others, such as Iran, to capitalize on our confusion and adapt their strategy accordingly, while we can’t seem to agree on how to respond.
As long as we continue to allow our enemies to exploit our vacillation and indecision, there are sure to be more attempts to attack our homeland, some of which are bound to succeed. To succeed, they only have to be right once, while to prevent them we must be right 100% of the time.
I believe we should push Congress to debate the issue and vote up or down for an open declaration of war on our enemies.
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