Asymmetrical Information - Megan McArdle

05.14.13

The Real Scandals of the IRS

Apparently, investigating conservatives for being conservative isn't real enough.

There's a growing school of thought among columnists and television pundits which says that the "real" scandal in Washington is not the fact that a government agency investigated people based on their political leanings, but that 501(c)(4)s are multiplying like Typhoid bacteria, allowing anonymous donors to fund unlimited amounts of political speech.   These groups, it is rather tediously explained, should actually have been registered under section 527, which would require them to disclose their donors. A related genre is the column explaining how the real victims here are liberls*, the Obama administration and maybe the American public.

I'm going to stick with "the real scandal is a employees of a government agency using the large powers we have granted them to selectively investigate people based on their political beliefs" and "the real victims are the people who were investigated", though of course, I think this is also terrible for the American people, because we deserve good government.

Nonetheless, it seems that on the second day, we need a fresh angle, and the angle is finding the "real scandal".  So here are my nominees:  

The real scandal is that the IRS doesn't understand statistics  The main defense seems to be that well, there was a big explosion of 501(c)(4) groups after the Supreme Court ruled in Citizens United that the free speech rights granted to citizens under the constitution extended to the groups that those people agreed to form, and that therefore the McCain-Feingold restrictions on corporate spending around election time were unconstitutional.  And because the Tea Party was forming right around that time, those groups tended to be disproportionately conservative.  

As a defense, this is terrible.  Essentially, they're arguing that the IRS was using "Tea Party" and "Patriot" as proxies to search for groups formed after Citizens United.  But you don't use a proxy when you have the ability to search on the actual variable.  It's like assembling a complete database of medical records in order to study lung disease, and then deciding to search based on smoking history rather than lung cancer and emphysema diagnoses.  It just makes no sense.

As I wrote yesterday, if they were worried about the post-CU explosion, they could have searched on the date the application was filed.  If it's actually true that most of the groups that formed up then were a) conservative and b) illegally electioneering, a search on the date would naturally have turned up lots of illegal, conservative electioneers.  We can tell just how bad their methods were by the fact that they didn't end up finding any illegality, just unnecessarily hassling groups for a couple of years.

The real scandal is that pundits (and the voters who read them) don't undersand the relevant law.  Josh Barro of Bloomberg addresses some of the most common misconceptions:

So when Jeffrey Toobin writes in the New Yorker today that what the IRS did was OK in part because “501(c)(4) organizations must refrain from traditional partisan political activity, like endorsing candidates,” he’s wrong.

There are limits: 501(c)(4)'s can't have electioneering as a primary purpose (such organizations must incorporate as 527s, which have to disclose their donors) and they cannot coordinate directly with political parties. They can’t have a narrow focus of advancing their funders’ financial interests; for example, utility companies can’t form a 501(c)4 to lobby for higher utility rates. That doesn’t likely implicate groups with broad goals like shrinking the government.

There are limits: 501(c)(4)'s can't have electioneering as a primary purpose (such organizations must incorporate as 527s, which have to disclose their donors) and they cannot coordinate directly with political parties. They can’t have a narrow focus of advancing their funders’ financial interests; for example, utility companies can’t form a 501(c)4 to lobby for higher utility rates. That doesn’t likely implicate groups with broad goals like shrinking the government.

It's true that 501(c)(4) organizations are supposed to promote "social welfare", but these days, most people have decided that the best way to promote social welfare is to lobby the government to do something about it.  That's why the Sierra Club, the Human Rights Campaign, and Organizing for Action (essentially an extension of Obama's campaign) can all be organized under this section of the tax code.

Relatedly, I've fielded a number of questions from folks who were under the misimpression that donations to these groups were tax deductible.  They're not.  The "tax exempt" status means that these groups don't have to pay taxes on contributions, which would otherwise be booked as profits.

Which brings me to my third point:

The real scandal is that all these complicated tax rules exist.  If we would just eliminate the corporate income tax, then people could organize groups, or not, just as they please.  And the IRS would not be in the position of deciding what counts as excessive political activity.

But Megan, you will say, isn't this just a list of things that you already cared a lot about, like statistical literacy and getting rid of the corporate income tax?  And indeed you're right.  But isn't that always the real scandal?

* This originally contained a link to a Josh Marshall post, but he disputes my interpretation, so I've removed it.