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NEW LIGHT ON THE IRS

The recent disclosure of a government plan to use "confidential" income tax data for planning purposes underlines the importance of hearings held in April to investigate the Internal Revenue Service. Under terms of Executive Order 11697 (later replaced by EO 11 709), the Agriculture Department has been authorized to inspect the complete income tax returns of all three million American farmers. The Justice Department has confirmed that the Agriculture Department's authority was designed to be the first in a series; successors would allow other federal agencies to extract personal financial information, for planning and analysis, from the income tax returns of other groups of individuals.

This new invasion of privacy was discovered and disclosed last fall by Rep. William Moorhead of Pennsylvania. This spring another legislator, Sen. Joseph Montoya of Montana, conducted a series of hearings dealing with IRS abuses. Among those testifying were individual taxpayers, tax experts, ex-agents, and the head of the IRS employees' union. The latter, Vincent L. Connery, president of the National Treasury Employees Union, provided details on IRS performance quotas for agents. Connery said that revenue officers were often forced by management to initiate levy or seizure proceedings against a taxpayer, rather than permit him to enter an installment payment plan, because of the paperwork and red tape involved in part-payment plans. Connery added, "Revenue officers are oftentimes rewarded for seizing a taxpayer's assets and severely disciplined if they permit him to remain in business or repay his debt." Announced IRS reforms are "no more than cosmetic," according to Connery.

Columnist Jack Anderson, quoting from Montoya's evidence, pointed out that audit quotas are set from the top down, beginning with a national quota ($3.4 billion for 1972), with sub-quotas for individual regions, states, cities, district directors, and individual agents. Although the quotas are merely "recommended," district directors who fail to meet them "can expect quiet pressure from Washington." Anderson also cited the poor quality of advice given out by IRS tax counselors, pointing out that opposite answers have been given to identical questions by different counselors.

The Church of Scientology has also joined the ranks of those exposing IRS abuses. Based on documents recently released under the Freedom of Information Act, the Church points out the "gross inconsistencies" in the agency's use of levies and seizures. Residents of New York, Maryland, and Missouri are three to four times as likely to have their bank account attached or their property seized in a case of a delinquent account than taxpayers in Wyoming, Kansas, Iowa, Maine, or North Dakota. Even within New York, wide discrepancies exist: in the Albany district over 60 percent of such cases end in seizures, compared with under 30 percent in the Buffalo district. Rev. Kenneth Whitman, who released the figures, charged that seizures of taxpayer properties are often conducted "on the whim of some tax collector" who may become favorably looked upon by his superior for being a "seizure man," as confirmed by the Montoya hearings.

Neither those hearings nor the other recent IRS publicity seems likely to change the tax laws or the agency's operating procedures. But their most important effect will probably be to further raise the consciousness of the American taxpayer, and promote the rapid growth of tax resistance.

SOURCES:
• "Tax Records: First the Farmers: Then?" DATAMATION, Dec. 1973, p. 105.
• "Taxpayer Seen Victim of IRS Quota System," AP (Washington), April 10, 1974.
• "Internal Revenue Horrors," Jack Anderson Column, April 7, 1974.
• "IRS Charged with Abusive Use of Seizure Powers," news release, FREEDOM (published by the Church of Scientology).

DECEPTIVE ADVERTISING?

The Federal Trade Commission likes to advertise itself as the champion of consumers, protecting them from unscrupulous businesspeople. Indeed, one of the FTC's assigned functions is protecting consumers against fraudulent advertising. Yet upon analysis, the agency's performance in this regard is highly questionable. Professor Richard Posner of the University of Chicago Law School recently completed a study of the FTC's deceptive practices decisions. He analyzed in detail the Commission's entire roster of decisions for three recent years, categorizing them into four groups: cases not involving serious deception, cases in which adequate private remedies exist, cases of criminal fraud, and all others.

The first category involves areas where the government takes an over-protective Big- Brother stance, regardless of the triviality of the circumstances: cases involving legitimate differences of opinion regarding product performance, nondisclosure of foreign origin of such products as watch bands and badminton set components, "misleading" product names, the use of "list prices" that are almost always discounted, lack of substantiation of product claims, etc. Cases of this kind constituted from 20 to 50 percent of the total caseload.

The second category concerns cases of falsely using trademarks of wool, fur, textile, and other products, and fraudulent sales to businesses. In both types of cases, private remedies are available and acceptable. Trade associations can and do police trademarks and quality standards, and business sales are covered by contracts enforceable in the courts or by arbitration. Depending on the year, this type of case comprised 30 to 70 percent of the total.

Actual cases of hard-core criminal fraud ranged from 7 to 16 percent of the total, yet ironically, these cases are inappropriate for the FTC because it cannot take really effective action. It can only issue fines and orders to cease and desist, thereby allowing the sellers to keep their ill-gotten profits and move on to a new type of fraud. Such cases would be better left to the criminal law.

After eliminating the above three categories as inappropriate for the FTC, Posner is left with a small residue of cases—between 3 and 11 percent—which constitute fairly clearcut misrepresentation, cases he feels are appropriate to an administrative agency like the FTC (e.g., a watch falsely labeled as shockproof, a tape whose length is misrepresented, etc.). The actual number of such cases appears to be 10 to 20 per year. Yet the FTC spends several million dollars each year on "fraudulent and unfair marketing practices," in the above four categories, and forces business to spend millions more in litigation and compliance.

But the costs of the FTC do not stop there. Posner adds, "Besides wasting money on red herrings, [the FTC] inflicted additional social costs of unknown magnitude by impeding the free marketing of cheap substitute products, including foreign products of all kinds, fiber substitutes for animal furs, costume jewelry, and inexpensive scents; by proscribing truthful designations; by harassing discount sellers; by obstructing a fair market test for products of debatable efficacy; and by imposing on sellers the costs of furnishing additional information and on buyers the costs of absorbing that information."

In the face of all this, would caveat emptor really be so bad?

SOURCE:
• "Regulation of Advertising by the FTC," Richard A. Posner, American Enterprise Institute for Public Policy Research, Nov. 1973.

A PENNY SAVED…

Hoarding of pennies has surged in recent weeks, in response to announced government plans to bring out a new aluminum penny. As it did with silver in the sixties, the government has responded with threats against the hoarders. Outgoing Treasury Secretary George Shultz has issued regulations prohibiting the export or melting of pennies, and ordered the Secret Service to enforce them. U.S. Mint Director Mary Brooks has tried to discourage hoarding by issuing a press release claiming that the aluminum penny plan has been dropped, and stating that "even if" the price of copper rises to $1.50 a pound (the melt-down point), it would take 240,000 pennies to earn a $100 profit. But she neglected to say what the profit might be at $2.00 or $2.50 a pound.

The controlled U.S. copper price was only 80¢ a pound in May, but the free market international price was $1.20, with prices for delivery three months ahead at nearly $1.40. Meanwhile, the Firestone Bank of Akron, Ohio began paying $1.10 for 100 pennies, the same price being offered by many coin shops. In Los Angeles, the coin shop selling price has already reached $1.26. Thus, many are already profiting from penny hoarding, the U.S. government notwithstanding.

SOURCES:
• "Treasury Warns Hoarders: Penny Pinching Won't Pay Off," UPI (Washington), April 17, 1974.
• "Copper Price Out of Sight, but Comedown Could Be Due," John A. Jones, LOS ANGELES TIMES, May 6, 1974.
• "What Bank Needs Is a Good 1-Cent Penny," AP (Akron), April 29, 1974.

OBSOLESCENT AGENCIES

The federal government justifies many of its recent regulatory measures as providing "consumer protection." Yet the critical standard applied to the market by many consumerists and bureaucrats never seems to be turned on the government itself.

Yet, notes Prof. Roland N. McKean of the University of Virginia, the "products" of government are "inferior, wasteful, dangerous, and against the public good." Writing in the University's TAX REVIEW, McKean lists tariffs, price-support programs, regulatory programs, public housing, welfare, and defense as public goods which should be as critically examined as is the private sector's output—from the standpoint of quality, safety, price, advertising, and misleading information. "As a consumer," adds the former Rand Corp. researcher, "I do indeed feel put upon regarding the quality of my goods. But it's not so much because my hot dogs are 30 percent chicken and bread crumbs; it's much more because my public goods often seem to be 70 percent baloney."

It is in this spirit that Senator William Proxmire has called for the abolition of 16 federal agencies, on the grounds that they are useless and wasteful. The agencies are as follows:

  • Interstate Commerce Commission
  • Selective Service
  • Renegotiation Board
  • Civil Defense
  • Cost of Living Council
  • Pay Board
  • Price Commission
  • Committee on Dividends and Interest
  • Construction Industry Stabilization Committee
  • Rent Advisory Board
  • Committee on the Health Services Industry
  • Committee on State and Local Government Cooperation
  • CIA's "department of dirty tricks"
  • Small Business Administration
  • Overseas Private Investment Corporation
  • President's Council on Physical Fitness.

Although the list is very limited, Proxmire has made a good start. Hopefully, his initiative in offering this list will be the beginning of a new form of campaigning. Instead of outdoing each other with promises to create new agencies and programs, how refreshing it would be to have politicians competing on the basis of which set of agencies they would vote to abolish.

SOURCES:
• "Paying Taxes Is Long Process," Chet Holcombe, SANTA BARBARA NEWS-PRESS, April 10, 1974.
• "Proxmire Wants Agencies Ended," AP (Washington), April 15, 1974.

MILESTONES

• Antitrust. For the first time in 24 years the Justice Department has lost an antitrust appeal in the U.S. Supreme Court! The 5-4 vote united Justice Potter Stewart with Nixon's four appointees in what may be a new probusiness majority in such cases. The case sustained the merger of two Illinois coal companies over the vigorous objections of the Justice Department's antitrust division. It turned on the definition of markets affected by such mergers. For years Justice has argued that competition is "restricted" by mergers, using a very narrow definition of the relevant market, while companies have pointed out the wider context in which they operate, both geographically and in terms of substitute products. It is this latter, more realistic view of competition that has been sustained for the first time in the Court's new ruling. (Source: "U.S. Loses 1st Antitrust Suit Plea in 24 Years," John P. MacKenzie, WASHINGTON POST, March 20, 1974.)

• Energy. In a surprising turnabout, liberal Senator Mike Gravel (D-Alaska) has endorsed laissez-faire capitalism. In a banquet speech to the American Society of Heating, Refrigeration, and Air Conditioning Engineers, Gravel said that the real energy crisis is the adverse economic impact which he predicts will come if free enterprise is not permitted to deal with energy matters free of government interference. Gravel suggested that crisis and catastrophe are the country's lot unless laissez-faire becomes the nation's economic posture. (Source: "Senator's Energy Talk Was Praised, Panned," AIR CONDITIONING, HEATING AND REFRIGERATION NEWS, February 25, 1974.)

Money. The Nixon Administration in February abolished a set of Kennedy-era controls on the movement of capital into and out of the country. As a result, Americans are at last free of the interest equalization tax on shares of foreign stocks (such as South African gold mining shares). Also, banks no longer must abide by "voluntary" Federal Reserve guidelines on foreign loan volume, and corporations are no longer subject to a complex set of restrictrictions on foreign investments. (One sour note is that the interest equalization tax has not been abolished; it has simply been set at zero, leaving the door open for future increases.) In quick succession after the U.S. action, the governments of Canada, Belgium, The Netherlands, and West Germany also lifted their capital controls. (Source: A Step Toward Freedom," TIME, February 11, 1974.)

Postal Competition. The Independent Postal System of America (IPSA) has been acquitted of "mail fraud" charges brought by the federal government. The directed verdict cleared the company, its president, and two vice presidents of all charges. The judge's ruling affirmed IPSA's legal right to solicit and deliver third and fourth-class mail in competition with the U.S. Postal Service, thereby ending a period of government harassment of the highly successful company. (Source: News item, LOS ANGELES TIMES, April 30, 1974)

• Licensing. Since 1962 a group of doctors has been forbidden by law to practice their profession in California. Osteopathic physicians and surgeons were prohibited from being licensed as osteopaths (and hence, from practicing osteopathic medicine) by a 1962 ballot initiative sponsored by the California Medical Association, in order to strengthen its state-backed monopoly on the practice of medicine. Prior to that year, osteopaths accounted for 10 percent of all doctors in California. Now the California Supreme Court has unanimously ruled the 1962 measure unconstitutional, charging that it violated the equal protection provisions of both the state and federal Constitutions. Attorney Alexander Tobin, who brought the case to the Court, noted, "The most significant aspect of the decision is that it gives California about 850 physicians and surgeons who can come immediately into the State fully trained and without one dime of cost to the taxpayers." (Source: "High Court Voids Ban on Osteopath Licensing." LOS ANGELES TIMES, March 20, 1974.)

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