Steven Rattner on economic policy, finance and business.
Let’s stipulate that the scandal involving the Internal Revenue Service’s targeting of conservative nonprofit groups portrays government as if drawn in caricature — an almost Keystone Kops-style comedy of errors on the part of low-level staffers, with a vein of possible political bias.
Of course, the matter needs to be fully investigated, those responsible need to be held accountable and procedures need to be put in place to ensure that nothing like this can happen again.
But let’s also remember what the I.R.S. brouhaha is not. Unlike the abuse of the I.R.S. by President Richard M. Nixon, in this case there’s no evidence that anyone in the White House had any involvement in — nor even any knowledge of — what was going on within the agency’s Tax Exempt and Government Entities Division.
In the post-Watergate years, legislation was passed to protect the I.R.S. against political meddling from the executive branch. That included — unusually — a five-year term for the I.R.S. commissioner.
Until his departure in November 2012, the I.R.S. commissioner was Douglas Shulman, an appointee of President George W. Bush. (Yesterday, the acting commissioner, Steven Miller, who was a career civil servant, resigned under pressure.)
And finally, note that when Lois Lerner, the head of the Tax Exempt and Government Entities Division, learned that applications were being singled out if they contained words like “Tea Party” in their names, she ordered that the practice be stopped. Regrettably, a bureaucratic ant colony succeeded in circumventing her instruction for several months.
By way of background, the decision in 2010 to target groups with certain words in their names did not come out of nowhere. That same year, the Supreme Court decision in the Citizens United case substantially liberalized rules around political contributions, stimulating the formation of many activist groups.
In the year ended Sept. 30, 2010, the division received 1,741 applications from “social welfare organizations” requesting tax-exempt status. Two years later, the figure was 2,774. Meanwhile, the staff of the division tasked with reviewing these applications was reduced as part of a series of budget reductions imposed on the I.R.S. by anti-tax forces.
A far higher proportion of the new applicants wanted to pursue a conservative agenda than a liberal agenda. So without trying to defend the indefensible profiling, it wouldn’t be that shocking if low-level staff members were simply, but stupidly, trying to find an efficient way to sift through the avalanche of applications.
One of the bigger ironies about the I.R.S. imbroglio is that it had nothing to do with taxes. These newly formed entities didn’t seek 501(c)(4) status to avoid taxes — these groups don’t earn profits and therefore don’t pay any taxes, regardless of their status. The important benefit that came from achieving 501(c)(4) status was freedom from having to disclose the names of any of their donors.
That’s right, what the I.R.S. was really deciding in these cases is which organizations have to disclose their funders and which don’t. And what it was trying to do — however dumbly it went about it — was to reduce the abuse of the campaign-finance rules, not the tax laws.
Without 501(c)(4) status, these groups would have had to organize as what are known colloquially as “super PACs.” While this would have afforded them greater flexibility to overtly support candidates, the names of their donors would have to be made public.
In theory, 501(c)(4)’s are supposed to be social welfare organizations. But the rules are vague and are often stretched.
Some groups have interpreted the regulations as permitting them to spend as much as 49 percent of their funds directly advocating for or attacking the election of candidates, maintaining all the while the secrecy of their donors’ names.
Perhaps most incredibly, a 501(c)(4) can even transfer a portion of its funds to a super PAC, which can — thanks in part to the Citizens United decision — freely support candidates for office
Karl Rove established just such a structure by pairing a 501(c)(4) organization (Crossroads GPS) with a super PAC (American Crossroads). By some accounts he raised as much as $300 million for these entities. And yet there’s no evidence that the I.R.S. ever questioned the 501(c)(4) status granted to Crossroads GPS.
So let’s, by all means, find the wrongdoers at the I.R.S. and punish them. But the biggest take-away from the I.R.S. mess should be that our campaign-finance system is in desperate need of overhaul.<!-- end .entry-content -->