Income tax

An Open Letter to President Reagan

The income tax, Mr. President, is the issue—not harassment by the tax police, not "bracket creep," not loopholes for the rich, but the very income tax itself.

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501 East Buffalo Ave., #105
Tampa, Florida
April 15, 1981

The President
The White House
Washington, D.C.

Dear President Reagan:

This may not be a very good time to try and talk with you—what with your monumental job of trying to deal with 20 years of deficits and fiscal chaos. But on the other hand, it might be the best of times. It's early in the presidential term, and you're working out strategies for dealing with the last several decades of mismanagement and irrationality in government.

No doubt you have armies of people pulling at you from all different directions right now. An absolute economic crisis, with runaway inflation as well as runaway government spending, must somehow be controlled. And our sadly neglected national defenses must be refurbished after years of getting short shrift from otherwise big-spending politicians. Then there's perhaps the most difficult problem of all: how to get the long, heavy arm of government and its attendant bureaucracies off the backs of the American people.

Probably no one would go out on a limb right now and say that any of these problems can be solved quickly, or even during your entire four-year term. After all, some of them have their genesis as far back as 1932, when even you were enthralled by the vision of a "Santa Claus" government that could be all things to all people, handing out a constant stream of wealth to whoever wanted it and somehow, in the process, staying out of the way of those in our society who do the producing of wealth—the workers, the entrepreneurs, the owners of land and capital.

Of course, the Santa Claus concept of government never has worked. You quickly came to that realization yourself. And so have lots of other people recently. That's partly why you're our president today.

So with all this said, and with hope that you can at least begin to move in the direction of the changes that need to be made, I want to add my voice to the pleadings. Because, you see, there's one specific area in the workings of our government and society that, if left to fester and ride upon the backs of the productive citizens of America, can make all your reforms and changes go for naught.

THE PEOPLE ARE SCARED

I'm speaking of a problem that has caused millions of people not only to move outside the law but, perhaps even worse, simply to stop producing. In many cases, they've thrown up their hands, shrugged their shoulders, and decided, "What's the point? What's the worth of it?"

This same problem, as if that wasn't enough, is one cause of people progressively losing confidence in the law. Even more important, they've started to lose confidence in the supreme law of the land itself, the Constitution. It's not because people really have a mind to go that way. It's just that they've been pushed in that direction. Slowly, in the beginning, and maybe not even with full comprehension; more recently, in an accelerated and more clear-headed manner. People, especially the American people, will only take so much. Then they've got to go their own way, even though it may mean turning their backs on a government, a political system, that they once wholeheartedly believed in.

What I'm talking about here is the so-called subterranean economy. Involving millions of people, it is the social and economic phenomenon of an unreported, unregulated, untaxed economy existing coextensively with America's "official" economy. It is variously estimated to involve anywhere from $100 billion to $700 billion, and the latest studies show it to have expanded in recent years at a rate nearly three times that of the official gross national product. The most recent studies, incidentally, show this alternative economy to involve $700 billion, or about 27 percent of the GNP. That is, very simply put, astounding.

Now, you may be thinking that it's taken some pushing, some damnably big problem, to make this happen. And I'd have to agree with you—millions of decent, hardworking Americans who've been pushed up to and beyond their limit would have to agree with you too. Because the face of the problem, which is a very specific bureaucracy, has more power over people, amassed more information against them, and abused the Constitution and laws of this country probably more than any other single institution ever unleashed against America's people. In a way, it wouldn't be so bad were we to have an outright Gestapo formed in our midst. If an actual terrorist arm of the government were turned loose against the people…well, most likely the people could deal with the problem quickly and summarily. But what we have today, what is oppressing the people of this country, is harder to deal with.

The problem, I think, as with many such situations, is that this bureaucracy was probably formed with good intentions originally (although you're probably the first president in decades to understand clearly that the road to hell is paved with "good intentions"). And, as will happen with organizations that get out of hand, this one started small. In fact, it was originally so small that only a fraction of the people of this country were inconvenienced or most likely even aware of it.

Today, however, this organization can legitimately be called the most powerful and fearsome institution internal to the American Republic. It touches virtually every human being who is a citizen and many who are not. And it scares them. It just flat, plain scares most people. Not because of stupidity or irrationality, either. It's because this organization wants it that way. It plans for people to be scared. It very shrewdly utilizes the unprecedented amount of power it has over people from every walk of life for that purpose. Heck, that's even been admitted in print, as well as publicly, before congressional investigating committees. Which is really quite amazing.

THE TAX GESTAPO

There's only one such organization in America so widely feared and detested. It is the Internal Revenue Service, the ever-present "IRS." Now it may be that this organization is serving a necessary and valuable function, that of carrying out the laws contained in the US Tax Code. But it is also important to understand that this group of individuals is virtually all-powerful to the vast majority of Americans. "If they want you, they can get you," is the flat statement of Daniel Lewolt, recently executive director of the National Taxpayers Legal Fund, a Washington D.C., organization chaired by former-Senator Eugene McCarthy.

The statement is backed up by congressional testimony from victims of IRS abuse. Even the rich and powerful are not immune from such treatment, and it is no coincidence that the IRS is particularly diligent in scrutinizing the more visible and successful portions of the population. That too, is policy, as you are probably aware. In fact, you may well have been a victim of such policy in the past, Mr. President. By assailing the most successful people in our society, by going after those who are already in the public eye, by seeing that such people are attacked and harassed and humbled if possible before the tax-collecting bureaucracy.…Well, that's enough to put the fear of God into just about anyone.

And the thing is, Americans don't like to be scared. Not in general and not by their own government, in particular. It's been a long time since the American Revolution was started by a bunch of tax protesters. It's been a long time since we've really wanted or needed a revolt. But that's what appears to be happening today, right now, with the growth of the subterranean economy.

The revolt of the people of this country is showing up in other ways, too. All You Need to Know about the IRS, an ugly exposé of how the tax bureaucracy instills fear in the American people, written by someone who was one of them, was a bestseller for weeks and weeks in 1980. Have you heard about the full-length motion picture released in 1980, Harry's War? It, too, is a popular exposé of how the IRS ruthlessly tries to smash anyone who might try to oppose it. The hero of the movie, a normally mild-mannered postman, is driven to actual warfare by the tactics of the tax agency. "Hitler would have loved the IRS!" he roars out at one point. And he's right. The IRS really is the closest thing to a Gestapo that America has ever seen.

Even Jimmy Carter, big-spending liberal that he is, recognized that the income tax system is "a disgrace to the human race." He naturally promised to reform it. The problem was that Carter, along with most of the Democrats he led, never even had a glimmering of what the solution might be. Tinker with the system just a little more. Harass a few businessmen for taking the "three-martini lunch." Tighten up a few "loopholes" because "everyone should have to pay something," as Carter put it. Maybe even widen the tax brackets or index them to inflation. None of which, of course, would have really done much for the public, put upon by a voracious tax-collecting agency and a tax system now almost totally out of control.

I guess I've gone pretty far afield from what I originally wanted to ask you to help us with. It's pretty hard not to lose track when you're talking about what may be—along with the destruction of our money by inflation—the most terrible and enduring wrong done to the American people by their government since the beginning of the Republic. For a free people to be penalized in progressively larger amounts, according to who is the most hardworking and successful—it's hard to square that with a realistic idea of the promise that was America. Oh, you can put a label on it and call it "progressive," but where does that really leave us, other than in the company of a group of influential welfare-state spenders, trying desperately to hold on to their power?

The plain fact of the matter is, the graduated income tax necessitates having a dangerously powerful bureaucracy that can accumulate information on American citizens far in excess of anything that any government should want or need. The possession of so much information on just about every individual in this country fairly begs for misuse. All are equally vulnerable to bureaucratic blackmail.

You know about that, perhaps more than most people, Mr. President. You know what it feels like to be harassed and attacked by the tax police. They started in on you right after World War II, charging for taxes you thought would never have to be paid. Then you found yourself in the 91 percent tax bracket. And just about ever since they've been nipping at your heels, worrying you about your finances. You can imagine what such harassment and constant battling mean for those who are less well-off financially than yourself.

HIGH-HANDED EXCESSES

To most of the citizens of this country, a call from the IRS, besides being a terrifying experience—because no one, not even the experts, can be 100 percent sure of what much of the tax laws actually say—means they can expect no mercy, no fairness, not even honesty from the tax-collecting arm of the government. The idea is even enshrined in federal court cases that say the IRS doesn't have to follow its own advice. In fact, they can turn around and fine you for doing what they told you to do in the first place. In the face of this kind of Alice-in-Wonderland Catch-22, most will have to simply pay up when the IRS decides how much they want to take. Who can afford high-priced attorneys and accountants?

Besides, most people are simply trying to lead an honest, decent life. More than anything else they just want to be left alone. They have neither the time nor the resources nor the inclination to get engaged in a running battle with the tax authorities. This, of course, means the IRS may have the most potent weapon of all against the American people: constant harassment, constant worry, constant threat.

In the face of it all, is it any wonder that most people find it better to just shut up and pay, rather than face the full wrath of what the IRS can bring down upon their heads? After all, the tax collectors are paid to take people's money; doing their job full-time means they can spend virtually any amount of time and energy concentrating on any individual. Recent history has shown that when the IRS wants someone—and people have actually been driven to their deaths by this agency—they can "get" them.

Your own close associate, the Hon. Sen. Paul Laxalt, has extensive knowledge in this area, of the depredations committed almost daily by the Internal Revenue Service. Citing a recent Roper poll that found that "64 percent of the adults of this country think our tax system is totally unfair," Senator Laxalt went on to point out in congressional testimony: "The high-handed bureaucratic excesses of the IRS are a national disgrace. Evidence reveals that the IRS singles out areas of the country for special enforcement. It will go completely against Congressional intent and 30 years of past policy by changing its rules to squeeze out more revenue. When it seizes the property of innocent third parties, it makes no provision to rectify this wrong. It creates economic models and then ignores actual taxpayer evidence that runs counter to those models. It gives taxpayers help, often of poor quality, but will prosecute the taxpayer if the IRS is wrong. It will harass taxpayers with litigation, not to mention office intimidation. And when it sees fit, it will even ignore the clear rulings of the federal courts."

Going one step further, Senator Laxalt flatly stated, "We appear to be witnessing an agency totally out of control, running roughshod over taxpayers and making a joke out of our rules of laws. The cases of abuse are easy to document and too numerous to count.…I am unsure whether we must start at the bottom and rebuild the entire agency, or whether we can reform the present body."

Former Sen. Eugene McCarthy, concerned with the depredations of the Internal Revenue Service, went so far as to assume the chairmanship of the National Taxpayers Legal Fund, an organization striving to protect American taxpayers against the tax-collecting agency. He has publicly pointed out that "it is common knowledge that the IRS regulations applying to investigations are ambiguous and almost impossible to decipher. In addition, the IRS takes great pains to create an aura of fear surrounding compliance with tax laws. Many millions of dollars are expended by the IRS to promote their convictions for non-compliance with the tax codes.…In tax matters, by law, people are presumed guilty until they can prove innocence. The taxpayer is forced, in an assessment situation, to defend his position in court, which is time-consuming and expensive. It serves as a fine against him for daring to question the decree of the IRS."

Both Senator Laxalt and former Senator McCarthy see some kind of "reform" or "taxpayers' bill of rights" as the possible solution to the problem of the Internal Revenue Service. But, sadly, neither are addressing the very basic problem that cannot be solved simply by a little tinkering with the tax bureaucracy here, perhaps a few new regulations or laws there. This is because the problem of the enforcing arm of the present tax laws of the United States is inextricably bound up with the way taxes are assessed.

The basic problem with the tax system in America today is not the IRS running "roughshod" and "out of control" over people's rights, as it does. The problem is the "progressive" income tax itself.

PENALIZING SUCCESS

It's funny, it must have sounded like such a wonderful idea back in 1913 when the 16th Amendment was passed to allow the taxation of income. "Only the rich people will have to pay!" was doubtless the cry. And it worked.

Ignored were the cautions of those like Edward S. Beach, who on October 11, 1913, warned in a letter to the New York Times that the new income tax law was about to unleash an "army of Federal spies whose nose will be stuck into the affairs of every man suspected of having an income of $3,000 or more a year." He further warned that "the millions who have scraped and saved to provide life insurance or put by money in savings banks will sooner or later discover that in their passion to sting the more fortunate and the rich they have stung themselves by the very class legislation which the Democratic politicians have foisted on the country as a bait for votes."

Doubtless such reservations were dismissed with smiles by those who championed the new income tax. Only the rich will have to pay!

Thus was a form of institutionalized covetousness introduced into the American experiment. What else can it mean when one person, the more hardworking and successful of two, must have 70 or 80 percent of his earnings confiscated by the government, while the less industrious of the two, the one who owns or makes less money, will have only 20 or 30 percent of his pay taken away? To a rational person, thinking of the value of productivity on the part of each and every individual in a society, such a result just doesn't make sense. Success is penalized. It's as simple as that.

Of course, to those who feel that success itself, and the material riches that success brings, is somehow immoral, perhaps gained at the expense of others…well, then the graduated income tax doubtless sounds like great fare. After all, not only are "those who can afford to pay" made to shoulder a much larger share of the burden, but the inequity caused by some people "having more than their fair share" is supposedly redressed. You yourself addressed the unfairness and stupidity inherent in such arguments during the televised debates during your presidential campaign: Why is it somehow "better" when government takes people's money and spends it—instead of those who earned it?

As to those who argue that someone having more than another is "unfair," where is the "redress" when the government confiscates an individual's wealth? In welfare and food stamps? Such schemes have benefited the bureaucrats who administer them far more than they have benefited the truly needy. So much so, in fact, that we now find three of the five richest counties in America, by family income, huddled protectively around Washington, D.C.

In addition, such arguments spring from a conception of society as a "zero sum," closed system. How can someone be seen as "taking more than his share" when successful people actually create wealth that benefits the entire society? Only someone who sees society as having only a finite amount of wealth, which must be divided up like slices from a pie, could possibly hold that a graduated income tax is a "good thing" for the people. That is simply not the way the world works.

But believe it they did, enough to institutionalize what is seen by a majority of Americans as the unfairest tax of all. Enough to lay the foundation for a government agency that virtually spits on the Constitution, mocking the notion of rule by law rather than by men.

GOVERNMENT WEAPONS

And that brings up the use of the Internal Revenue laws as weapons. Political weapons. Although wholesale law breaking and denial of rights by the IRS during the Nixon administration—complete with "enemies lists" to be audited and all—is most familiar to the American people, Richard Nixon was certainly not a trailblazer in that area. In Conversations with Kennedy, Washington Post Editor Benjamin Bradlee's book about the Kennedy years, Bradlee speaks of laughing together with Pres. John F. Kennedy and Atty. Gen. Robert Kennedy over lists of business executives being compiled for IRS audits. The crime: refusing to go along with the president's guidelines on steel pricing.

Karl Hess, former speechwriter for Sen. Barry Goldwater, and himself now an income tax resister, recounts the story of a good friend and supporter of Senator Goldwater's who was called on the phone by Pres. Lyndon Johnson. It seems the president had that individual's income tax returns on his desk and found them "very interesting." The price for not sending the IRS on a fishing expedition into the tax returns was a fund-raising party for Johnson's friend, Hubert Humphrey. "I can't take that kind of close examination of my tax returns," the man tearfully told his friend, Senator Goldwater. "I'm sorry, I'm going to have to give that party for Senator Humphrey."

It would be easy to go on, not only about the tax police but about the fundamental evil of a graduated income tax itself. About how, for instance, such a tax encourages inflation, which, as you know, is caused by government. With larger and larger percentages of people's earnings being taken by the government—as people are kicked into higher and higher tax brackets, even while their standard of living stagnates—more spending is encouraged. As the momentum of higher and higher spending levels increases, deficit spending is encouraged, which in turn causes more inflation. Higher inflation levels further enrich the government and those who live off of tax payments, which in turn encourages still more spending and more giveaways…which in turn helps to cause higher deficits, more inflation…and so forth.

But enough. You know and understand these things yourself, Mr. President. My plea is simply this, for myself and for millions of other Americans: Please don't let them tinker away this best chance we've ever yet had to do away with the unfairness of a tax that penalizes hard work and success. You know this is what they'll try to do, all those who are living so high and well on the backs of the taxpayers. We may not even get another chance, politics being what it is.

TAXING ALTERNATIVES

And given that a clear majority of the American people see the federal income tax as the most unfair tax they pay, why not make some fundamental changes? Why not just toss the flawed system out entirely, get rid of the graduated income tax and put in its place, for instance, a flat-rate tax that would yield the same amount of income for the government (if that were seen as a desirable end, which it surely is not)? The Nobel Prize-winning economist Milton Friedman has figured that a simple, flat-rate tax of only 13 percent would bring in the same amount of revenue as the government currently receives.

Or, perhaps better yet, rather than compounding the error by perpetuating a fundamentally wrongheaded tax, why not scrap the concept of taxing income altogether and replace the entire system with a tax on consumption. Besides righting the inequity of taxing people for working hard and being successful, this would encourage living within one's means, as well as promote savings. A higher level of savings in a society, forming the all-important capital pools from which come material progress, means a higher standard of living throughout the society.

Either suggestion means the end of the sort of internal "tax police" we've become saddled with. If the tax laws are in fact easy to understand, and everyone pays a flat rate of some kind, what is the necessity of an all-powerful bureaucracy constantly checking on everyone, making sure no one took the wrong deductions? Or "too many" deductions? If our basic tax code involved a simple, flat-rate tax, there would be no need for the myriad complexities of the present tax code—and thus no need for a powerful tax bureaucracy to interpret it.

Not that it would be easy to do this. It would be a long, viciously fought battle. Even though everyone seems to agree about the unfairness of the present tax system, someone must be benefiting from the way it exists today. And that is predictably the problem. Besides the most obvious beneficiaries of the tax system—lawyers, accountants, tax preparation specialists, who together take in millions, if not billions, each year thanks to the complexity of the tax code—there is, of course, the government itself. It reaps, as noted, huge and continuing windfalls. The more inflation it causes, and the more distress it thereby causes among the people in our society, why, the better off it is.

Then there's still a third group that can be expected to fight against any real change in our tax system: the very wealthy. Paradoxical as that may seem—since "upper income" individuals pay by far the majority of income tax in America—the reason for it is obvious. Our present crazy-quilt, patchwork system of income taxation, as unfair as it is to the middle classes, has embedded in it thousands of ways to avoid taxation.

The problem is, you need the help and advice of trained experts to figure out how to use the tax code against itself. No unschooled person can possibly take full advantage of the tax-reducing possibilities in the present tax laws. That takes an expert. And such experts are quite expensive. But what of it? When structuring your finances so as to avoid taxes saves you 70 or 80 cents on the dollar, of course you're willing to pay top dollar for such expertise. It would be irrational to do otherwise! So we yearly are treated to stories in the popular press of millionaires who pay nothing. And, Jimmy Carter's chagrin at having a zero tax liability one year notwithstanding, they are not wrong for doing it!

The problem, I repeat—and repeat again, if necessary—is the very notion of a graduated, "progressive" tax on income itself!

NO ONE ESCAPES

At some point here, it may fairly be asked how I know all of this. What is my own interest, beyond simply being a member of society myself? To which I would have to answer: I myself am a beneficiary of the system as it exists. I am a lawyer and a tax specialist. However, that places a very heavy burden on one who feels strongly about injustice. Because I daily see the suffering caused by our present tax system. Because I view at first hand the dumbstruck fear when the tax police decide to examine someone's finances. And I know, more than anyone who doesn't work in this business, that absolutely no one, rich or poor, young or old, a member of the majority or of any minority, is exempt from Internal Revenue Service pressure and harassment.

I've had clients who were on welfare—yes, welfare—presented with tax bills from the IRS for hundreds of dollars. Money that the individual, in any case, did not owe. I've worked with the struggling single mother who is not on welfare but only barely "making it" with her three small children to support. After having one IRS auditor recommend one thing, another turns around and assesses her still more money. And when she gets a lawyer to change the terms of her divorce, so as to change the tax consequences, the IRS simply says, "We won't honor that." In desperation, she turns to her local congressman, a powerful figure on one of the tax-writing committees…and is as much as told, "Do what they tell you to do." Except she can't, because she doesn't have several thousand dollars.

So the pain and fear and sense of hopelessness grow. And the hated IRS continues "doing its job." It is this close-up view of what the IRS can and does do to people that prompts me to ask you for help.

Mr. President, for the millions of us in America trying desperately to make ends meet, for the millions of us who fervently desire nothing more than to be left alone, for the millions of us who desire to work hard and avail ourselves of nothing more than the American dream of success and comfort, the workings of the US Tax Code, backed up by the Internal Revenue Service, have made our plight close to unbearable—in some cases, past bearing, in fact. This, finally, is the meaning of the explosive growth of the "underground economy." As Senator Laxalt put it: "Our entire tax structure, which is tremendously dependent on voluntary compliance, is in danger of toppling."

The only question that remains is whether such an iniquitous system should be prevented from toppling. Almost everyone will agree that a free people will voluntarily place taxes upon themselves in order to receive "the blessings of government." But the same majority will agree also that the size, scope, and taxing powers of government today have gone almost totally out of control, haywire to the point where no one can stop it and no one can understand it.

The entire system, Mr. President, needs to be scrapped. The notion of so-called progressive taxation needs to be reexamined. In the last analysis, it never was more than an institutionalized form of that which the Tenth Commandment warns stringently against: "Thou shalt not covet thy neighbor's house; thou shalt not covet thy neighbor's wife, nor his manservant, nor his maidservant, nor his ox, nor his ass, nor any thing that is thy neighbor's." With the machinery of a graduated income tax in place, no one's house, servants, ox, or ass is safe from the clutching hands of government.

WILL IT TAKE A REVOLT?

I'm sorry to have perhaps gone on too long about all this. Maybe the problem will solve itself. Maybe something can be done to legitimize the current tax laws of the United States in the eyes of the people. It's doubtful, but perhaps possible.

On the other hand, maybe the people have believed for too long and too fervently in our form of voluntary taxation. Maybe they've let it get out of hand by putting up with far more than they should have. Maybe the growth of cynicism and disrespect for the tax laws is a good thing. After all, even medieval serfs were only taxed 25 to 35 percent by their lords and masters. Today, the American government has surpassed that level.

One way or another, something will get done. Maybe we're long overdue for the revolt that is now occurring. It looks like those who live on the backs of the taxpayers have become just a little too complacent, pushed their good thing a little too far.

Your election, Mr. President, is one signal that the people have just about had enough. In one sense, you are the revolution—or at least a part of the revolution. Because of this, millions of us regard you as our last, greatest hope—hope for dealing with an almost crazy, out-of-control government and tax system. Please take whatever actions you deem necessary, Mr. President. Please get the government off our backs. Please see that the members of Congress are made to understand the burden that all of us—rich and poor; young and old; men and women; white, brown, black, yellow, and red—are laboring under.

We could use a break at this point. We could use simply a fair shake. It's time to scrap an entire system of funding government and come up with something better, more rational. I'm sure you understand, and your conservative principles will lead you to the right answers. We can't take too much more of this. Thanks for listening.

Respectfully,
Timothy Condon

Timothy Condon is a member of the bar and a tax specialist with the Condon & Vollrath Tax Service in Tampa, Florida.