Using the Law to Stop the IRS

John Ransom
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Posted: Dec 22, 2014 12:01 AM

I was intrigued by an article posted by Dan Mitchell from Cato here over the weekend that in part said that how Republicans treat reform at the Joint Committee on Taxation (and the CBO) as a kind of an IQ test.

As Mitchell notes “when JCT does revenue estimates, the bureaucrats grease the skids for anti-growth tax policy by overstating revenue losses from lower tax rates and overstating revenue gains from higher tax rates.”

And indeed they do.

In fact, both the CBO and the JTC act as giant Ways and Means committees for higher taxes and bigger government.

But that’s not what intrigues me most.

What intrigues me most is that when the Joint Committee on Taxation was started, it was a temporary committee that was founded because the IRS (then called the BIR) was engaged in the same type of political bullying and illegality that the IRS has used against the Tea Party since 2010.

Senator James Couzens of Michigan, who helped found the JTC, was the Larry Ellison of his day. Like Ellison, who co-founded Oracle, Couzens made his money as the number two guy and management genius behind Henry Ford and Ford Motors. Also like Ellison he was the third richest man in America in his heyday, according to the Mackinac Center for Public Policy. After being bought out by Ford in 1913, Couzens served as a bank president, police commissioner, mayor of Detroit and was eventually appointed United States Senator from Michigan to fill a vacancy, later winning election in his own right.

As a Republican from Michigan he was considered a progressive and opposed tax cuts, supported the graduated income tax and –like another rich guy, Warren Buffet—acted as the self appointed popular voice against rich corporations, railing against favorable tax treatment for companies.

At the time Secretary of the Treasury, Andrew Mellon, himself one of the richest men in America was advocating a scientific basis for taxation, “the use of economic theory to identify the tax rates that would maximize revenue yet burden productive capital as little as possible,” according to George K. Yin at the University of Virginia Law School. In short he was proposing an infant Laffer curve.

Mellon noted that tax policy was distorting the distribution of capital with companies less willing to pay dividends to shareholders because of the hostile tax treatment dividends received. He also noted that wealthy people were more inclined to invest in tax-free municipal securities because of the different tax treatment that cities and states had versus corporations.

As a progressive Republican Couzens argued against Mellon, using his own status as a rich man to make his point. His argument—in a preview of Warren Buffet’s own stupidity—was that tax treatment made little difference in what types of investments rich people made.

This is my own experience, said Couzen, as I have largely invested my capital in State, county and municipal bonds, on which I really prepaid the taxes by taking a greatly reduced return from what I would have secured had I taken investments in new industries with the possibility of securing returns such as are made by original investors in motor stocks, bank stocks, and other more or less hazardous undertakings.

By inviting scrutiny of his tax situation, however, Couzen challenged Mellon publicly and also admitted that the tax treatment of investments changed his behavior. The result eventually was an examination in 1925 of Couzen’s tax liability for the sale of his Ford Motor stock in 1913, according to Yin, which was supposed to amount to 73 percent of the gains from the stock, a tax that Couzen said he supported.

The affair became unseemly with both sides using private tax records as weapons against the other. And when Couzens made the affair public in the Senate, the Senate was outraged that a sitting Senator would be subject to retaliation by an administration.

Thus was born the Joint Committee on Taxation whose expressed aim was to "investigate and report upon the operation, effects, and administration of the Federal system of income and other internal revenue taxes and upon any proposals or measures which in the judgment of the Commission may be employed to simplify or improve the operation or administration of such systems of taxes,” according to the JTC’s website.

In reality however it was there to stop internal revenue from being used as a political weapon.

I didn’t work as anticipated. Couzens was defeated in 1936 for reelection, in part because of the appearance he evaded taxes and in part for his support of the New Deal.

Since then the JTC has become nothing more than a giant committee of Ways and Means for bigger government, including the expansion of government debt at the local and municipal level by government economists who, like Couzens himself, think debt is just swell.

In an ironic ending to a history than is filled with unintended irony, Couzens’ ten bedroom, 9,800 square foot mansion in Detroit was listed in 2012 at $80,000 after last selling for $280,000 in 2001. The listing was a short sale according to published reports. The short sale was necessitated by the collapse of the very type of municipal financing schemes in Detroit that Couzens advocated and invested in.

If, as Mitchell suggests, how the GOP reforms the JTC is an IQ test for the party, the Republicans ought to turn the Committee into a real force to prosecute wrong-doing at the IRS as well as institute long-needed reforms, including abolishing the JTC if it can't do it's proper job in protecting taxpayers.