The recent shenanigans by staff of the Internal Revenue Service (IRS) demonstrate all too clearly why tax simplification is needed in the United States.
Here in Marietta, the Georgia Tea Party applied for 501(c)(4) tax-exempt status in 2009. After hearing nothing for a number of months, a member of the group’s board of directors contacted the IRS only to discover that their application had been lost. They had to re-file the same paperwork.
In early 2012, Georgia Tea Party received a 5-page letter with 28 multi-part questions with the requirement that the questions be responded to in two weeks. The group’s pro-bono attorney was able to get an extension of an additional two weeks, and the volunteers went to work. They had to generate nearly one thousand pages of information to satisfy the IRS’s request, answering all kinds of questions about their meetings, activities and personal lives.
Some questions were intrusive, such as listing all of the issues the group was interested in and their position on each issue. What difference is a group’s political position if they are carrying out advocacy and education activities consistent with their exempt purposes? Why would information such as a political position on an issue be necessary to determine tax-exempt status? Would an “incorrect” position be grounds for denial of tax-exempt status? If anything demonstrates grounds for bias at the IRS, certainly this does.
Finally, this past fall, Georgia Tea Party was granted tax-exempt status. But many tea party groups have not been as fortunate.
None of this would be necessary if the United States abolished the income tax and the complex system of special-interest incentives, giveaways and social engineering that has become part of our tax code. Tax-exempt organizations exist because previous Congresses could not justify levying income taxes on charitable and social welfare organizations. There is certainly some logic in this approach, especially for religious institutions. If churches were taxed, for instance, they would begin lobbying Congress for special treatment, and preferences toward one group over another would inevitably infringe on the Establishment Clause of the First Amendment, which prohibits Congress from “respecting an establishment of religion.”
In the case of the recent scandal involving increased scrutiny of tax-exempt applications from tea party groups, it is obvious that the IRS has infringed on First Amendment freedom of political speech in the way that these conservative groups were flagged for review. Is this a legitimate purpose for a revenue code, to conduct a witch hunt against one’s political opponents?
If the U.S. shifted to a flat tax, with no carve-outs or exemptions, or a consumption tax, such as a national sales tax, the idea of tax-exemption would be unnecessary. But we saunter along with only a few leaders demanding fundamental change to the tax code. As with most profound change, we should look to the grassroots for solutions and not Washington, D.C. politicians.
Interestingly, some of the same folks who started Georgia Tea Party have come up with an idea called The Simple Tax. They propose to phase out the corporate income tax and to transition the individual income tax to a 10 percent flat rate over four years. Also part of the plan is for Congress to propose to the states the repeal of the 16th Amendment, which authorizes the income tax, and to replace it with a 9 percent national retail sales tax in January of the sixth year after the plan is introduced. The IRS would be reduced to collecting the sales tax and leaving the rest of us alone. If the repeal fails, then there would still be no corporate tax and a 10 percent flat rate personal income tax. Social Security and Medicare are not included in The Simple Tax plan.
The economic benefits would be dramatic. U.S. companies would become the most competitive in the world, because the cost of compliance with tax regulations would be completely eliminated. The cost of goods and services could be reduced, perhaps by as much as 20 to 30 percent. In short, we would see a significant surge in business activity that would touch all Americans.
No longer would an army of auditors travel the nation to harass businesses. And more importantly, individuals would not be intimidated by the threat of a dreaded IRS audit.
As with all fundamental change, such a policy shift requires leadership, and it is past time for folks in Congress to lead. The Republican-controlled House could shut down the government if it wanted to, but it has done little to advance tax reform on the scale proposed by the Simple Tax. It is obvious that the president will not lead on this issue, so Congress must.
Congress, as it investigates wrongdoing at the IRS, will likely do what it usually does: It will tinker around the edges and perhaps tweak a few lines of the tax code. But what is needed is fundamental change. And, we, the people, at the grassroots, realize this. Some leaders in Congress do as well. How long will it take for the rest of Congress to come up to speed?