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The IRS – Why Politicians Love It

 8 min read / 

If the Senate passing a budget has moved the needle towards passing tax reform and, assuming the closed-door drafting of coherent tax legislation produces something that lawmakers can read and understand, the Internal Revenue Service (IRS) will have to start administering new rules very quickly indeed if any aspects of the new law are retroactive to 2016.

It is worth looking at the IRS and its role to see if it is likely to be up to the task.

The History of the IRS

The IRS was formally set up in 1862 to collect the new income tax that was raised to pay for the Civil War. It is part of the Department of Treasury. Treasury was set up by an act of Congress in 1789 and it comprises offices and bureaus. Bureaus represent 98% of the work of Treasury. The IRS is the biggest of all the bureaus and sits alongside nine other bureaus, which include The Alcohol and Tobacco Tax and Trade Bureau and the US Mint.

The IRS has 77,692 full-time employees (FTEs) in 2017 and is budgeted to have 71,910 in 2018. Treasury has authorization for $11.2bn of resources to fund the IRS in 2017 and has asked for $238mn less as part of the 2018 budget request – approximately 2% less than the prior year authorization.

The IRS was originally referred to as the Bureau of Internal Revenue. The name was changed to the current one as part of an overhaul in 1953. The IRS is organized into four basic sections: individual taxation; large business and international; small business and self-employed and tax-exempt and government entities.

The Role of the IRS

The IRS collects 61% of the revenue that is needed to run the country: to pay for armed forces; benefits to veterans; social security; Medicare; law enforcement; transportation and infrastructure; support for agriculture, energy, education and, of course, the cost of running the machinery of government and paying the salaries and benefits of elected officials. The balance of the funding comes from local and state governments – $1.9trn – and from $200bn of borrowing.

The challenge for a centralised, elected government is to persuade the electorate that it is a good steward of the revenues collected to fulfil the duties for which politicians were elected – the duties that the electorate would rather others take care of while they live their lives.

The system of taxation in the US, as it is in the UK, is one that relies on self-reporting. Taxpayers are supposed to report the income they have earned. They are supposed to pay their fair share. The job of the IRS is to administer the system: to explain the rules; publish the forms on which it is reported; check that they have been completed correctly and, on occasion, conduct audits to check compliance.

These taxpayer compliance audits create anxiety in the taxpayer community. Everyone fears them, not necessarily because they are intentionally not compliant – mostly they are – but rather because of the time they inevitably consume. According to the 2016 IRS Data Book, the IRS conducted 1.2 million audits, less than 1% of the population.

Given these statistics, the anxiety is probably not warranted. The decreasing budget of the IRS constrains resources available to conduct these audits. Much of the audit work of the IRS is focused on corporations. Corporate tax returns are vastly more complex than those of individual taxpayers. Most (78% of corporations with balance sheets over $20bn) large corporations expect to be audited every year and know those audits will last potentially several years.

Patronage and the Federal System

Politicians, as well as being reliant on the revenue collected by the IRS to fund their salaries and generous health benefits, also depend on tax revenues to fund the political promises they made when running for office. The revenues collected by the IRS, however, are not the whole picture.

Steve Ballmer, former CEO of Microsoft, has spent some $10m of his own money funding a project called USA Facts. It is a massive undertaking and seeks to present the US much as a corporate annual report seek to give its shareholders a comprehensive picture of what it does.

USA Facts presents a Form 10K for the United States. The purpose of the report is to provide a detailed picture of the US from the federal to the local level in terms of demographics, revenues and expenditures. The goal is to create transparency and awareness; to pull together the vast amount of data that is collected by the US federal government, state and municipal authorities and to present it coherently in one place. It is an enormous and worthwhile project.

What emerges from USA Facts is that just over 80% of all taxes collected from individuals (85% for corporations) are collected at the federal level; the rest is collected by states and municipalities. Most of state and local tax revenues go to fund operating expenses. The measure of success of politicians elected locally and sent to Washington DC to govern is, in many cases, the ability to wrestle the federally collected tax revenues back to the benefit of their local constituents. Although politicians are obliged for public relations purposes to express outrage at the IRS, politicians need and love the IRS.

How People Feel about the IRS and Why

According to the 2016 IRS Data Book, last year, the IRS processed nearly 151 million individual tax returns; 2.2 million corporate tax returns; 4.8 million S corporation tax returns and 4 million partnership tax returns. 3.2 million individuals filed estate tax forms; a quarter of a million people filed gift tax forms. 1.5 million organizations filed returns for their tax-exempt status.

The IRS collected a total of $3.33trn from the 244 million tax returns filed from all sources. $1.8trn came from individuals; $346bn came from corporations; nearly $22bn from estate and gift taxes and the balance from employment taxes (just over $1trn) and excise taxes.

Clearly, the level of interaction that the population has with the IRS is huge. The highest viewership of a TV series ever in the US was for the finale of M*A*S*H in 1983 at 125 million. The 2017 Academy Awards estimated a worldwide viewership of 43 million and the 2017 premiere of Game of Thrones came in at 30 million. It is not surprising that many people have an opinion about the IRS.

That opinion is not always positive. In part, this is influenced by the number of historical abuses of power. The IRS has faced allegations of being used as a political weapon during the administrations of FDR, Kennedy, Nixon, Clinton, Bush and Obama. In part it is because of the perception that the IRS spends too much on collecting taxes – it costs 35c for the IRS to collect every $100 and in part because of the amount of time spent filling in tax returns that could otherwise be spent watching The Game of Thrones or re-runs of M*A*S*H.

The abuse of power is a serious issue. Civil Asset Forfeiture – a procedure designed to attack drug crime by seizing property deemed to be implicated in crime and reversing the usual burden of proof to recover the property – is a sufficient concern that around 25 states and Washington DC have reformed their asset forfeiture laws since 2014.

The IRS has suffered bad publicity for seizing bank accounts on no more than a suspicion of criminal activity arising from taxpayers making deposits of less than $10,000 ($10,000 is a reporting threshold for deposits and intentionally avoiding the threshold is called ‘structuring’). Notwithstanding the Attorney General, Jeff Sessions, has recently affirmed his support for the program, the IRS has indicated it will no longer seize bank accounts simply on suspicion of deposit structuring.

What Is the Answer?

$3.3trn is a lot of cash to collect. The IRS has sometimes been handed tough assignments – Obamacare is a great example – and the most recent iteration of tax reform, if it passes, is likely to be more complex than many. It is inevitable that mistakes will be made among over 70,000 full-time employees. It is inevitable that the organization empowered to collect the funds that politicians disburse to keep the country running and provide the patronage that keeps them in office will be susceptible to political influence.

The only defence against these inherent problems is effective oversight and transparency. Transparency is only valuable if the electorate makes the effort to inform itself. The information is available. USA Facts makes it easy to access. The price of complaining should be engaging. One should start here.

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Global Affairs

BP and Iraq Sign Development Deal for Kirkuk Oil Fields

 2 min read / 

BP Kirkuk deal

Iraqi Government and British energy giant BP have signed an agreement for the future development of the Kirkuk oil fields in Northern Iraq.

A statement on the Iraqi Oil Ministry’s website said the “memorandum of understanding” between the government and the London-based oil company would enable further development of the oil fields as well as “to open a new page of work” for the North Oil Company, a subsidiary of the Oil Ministry, on “solid foundations”.

BP Director, Michael Townsend, said the company would conduct the necessary surveys and prepare the required statistics.  He claims the company will increase production by 750,000 barrels of oil a day.

The Kirkuk Oil Field, discovered in 1927, is one of the largest oil fields in the world, producing half of Iraq’s oil exports, a reported million barrels a day. However, it has also been a wellspring for local instability: the fields had been seized in 2014 by the Kurdistan Regional Government, who piped oil across the Turkish border, a few hundred kilometres to the north. The fields were only retaken by government forces in October 2017.

Baghdad is attempting to reassert its authority throughout its provinces and according to Iraq’s Minister for Oil, Jahbar Ali al-Allaibi, Thursday’s announcement will “speed up the rehabilitation process”.

During the Saddam Hussein era, the fields suffered irrecoverable damage due to poor management. Excess production was reinjected back into the ground making Kirkuk’s oil thicker and therefore harder to extract.

On Wednesday al-Allaibi met with Britain’s ambassador, John Wilkes, where according to the ministry’s website, they talked about joint cooperation between the two countries in the oil and gas industry.

Keep reading |  2 min read


Trump’s Presidency and Russian Relationship: The Future

 4 min read / 

Trump Russia

Much has been said about Donald J. Trump’s love affair with Russia. Questions deserve a thorough and honest investigation. As distasteful and risky it may be, the best outcome of the enquiry is accusations continue to swirl, Trump limps through three more years, and in 2020, he is crushed at the ballot box. The world moves on. If removed from office, odds are Trump whips his base into a frenzy. Only the height and duration of civil unrest is in question. A worse case is that Trump emerges emboldened, eager to settle Putin’s longstanding challenge.

Putin Mocks Trump

The competition is real. Putin’s economic and political dominance gnaws Trump. Putin knows this. So, he taunts the President and dares Trump to employ the same ruthless tactics he exploited to consolidate power and possibly become the world’s richest man. Since Trump only sees green, he took the bait. The race is on to be the world’s first trillionaire.

Russia’s population is 142 million. Its $3.86trn translates into a measly $26,900 per capita GDP. In contrast, the 326 million people of the United States generate $18.62trn in GDP, nearly five times Russia’s total. The US per capita GDP of $57,600 more than doubles Russia’s. Despite Russia’s meek economy and reports  that Putin has embezzled up to $200bn in assets, Putin remains incredibly popular in Russia.

The apathy regarding this unparalleled heist makes Trump and Putin salivate over what they could jointly pilfer from the world economy. To advance their contest, the pair will identify a common threat. US-Russia relations will warm. Under the guise of “Peace through strength,” Russian sanctions will be lifted, and the Magnitsky Act repealed.

The administrative state in retreat, animal spirits will run wild. Trump’s name will be emblazoned across the globe. Countries desperate for jobs will be compelled to forge deals sponsored by Putin and Trump. Ethics be damned, the race to the bottom of the $120trn global economy will prompt a wave of corruption never seen before. Every facet of human decency will be compromised: environmental regulations, free and fair-trade by-laws, intellectual property, and human rights protections. The collusion is real.

In time, complicity will turn to double-crossing. It’s the Trump-Putin way. Makeshift “me-first” trade deals will collapse. Boycotts, divestitures and sanctions will be commonplace. Cooperation will evaporate. New political boundaries will be drawn with little world condemnation.

It doesn’t have to happen this way. Patience is a virtue. The checks and balances of the three branches of government are powerful mechanisms to thwart overt corruption.

Yet, for the impatient who seek Trump’s impeachment or removal via the 25th Amendment, be careful what you wish for. Only Trump can tame his army. To assume Trump will plead mercy at the feet of the administrative state contradicts Trump’s lifelong persona. He will relentlessly counterpunch and encourage his followers to do likewise. The short and long-term political and social risks are astronomical.

If Trump stems the tide, consolidates power and aggressively partakes in Putin’s race for two terms, the risks outstrip his forced removal. The consequences will be multi-generational.

Rope-a-Dope Is the Key to Containing Trump

The only path that possibly prevents extensive collateral damage is to check Trump into policy oblivion. Legislators must play rope-a-dope for as long as it takes, even three years if necessary. If Democrats take back both houses in 2018, the tactic will not set up Trump and his base for a final knock-out punch in 2020. For that to occur, numerous members of the GOP must join the effort. They too must throw periodic jabs at Trump then absorb a barrage Trump’s counterpunches.

With foes in every corner, even Trump – the self-proclaimed greatest counterpuncher in history—and his base will wear themselves out well before 2020. Then the decisive knockout punch can be delivered at the ballot box—without collateral damage.

Trump is severely wounded. If he gracefully and peacefully surrenders the Presidency, great. But don’t expect it. Rope-a-dope deployed by both parties is the countries best hope for a peaceful end to the Trump Presidency. Any other scenario risks the once unthinkable; an ‘American Spring’.

Keep reading |  4 min read


May Meets Macron

May Macron

The UK prime minister agreed to pay £44.5m towards tighter border security at Calais.

Editor’s Remarks: The French president arrived in the UK for the Anglo-French summit amid widespread complaints from the Tory party about just why Britain is paying another £44.5m for tighter security in France. One Tory MP pointed out that this addition brings the total figure the UK has paid to France in recent years up to £170m. France, meanwhile, says that the amount is necessary because the migrants in Calais are trying to get to the UK, who must, therefore, contribute towards their costs. The talks were also consumed by the imminent task of reaching consensus over the UK’s trade deal with the UK after Brexit goes through.

Read more on Europe:

Keep reading |  1 min read


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