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November 15, 2002, 8:30 a.m. Time to Tame the Tax Police We need an IRS commish who knows the law. By Veronique de Rugy

RS Commissioner Charles O. Rossotti recently announced that he is leaving the agency. This is great news for taxpayers and the Bill of Rights. Rossotti's scandal-tainted tenure has been highlighted by flagrant attacks on the 4th Amendment and gross abuses of the regulatory process. Adding insult to injury, his parting request is a bigger budget for the IRS. Hopefully, the Bush administration will choose a new IRS commissioner that respects the rule-of-law and understands that tax reform is needed to fix the problems in the tax code.

Rossotti's legacy certainly is disappointing. For instance, he is responsible for issuing a regulation to help foreign governments tax income earned in America. This misguided initiative, which would require U.S. financial institutions to automatically report the interest paid to foreign investors, is contrary to U.S economic interests. Faced with a loss of privacy, foreigners will take their money out of American banks, meaning less loan money available for families and businesses. And since the information the IRS wants to collect is not needed to enforce U.S. tax law, it seems fair to ask whose interests the commissioner was serving.

To add insult to injury, the IRS has always refused to legally conduct a required cost-benefit analysis of that proposed regulation, showing a profound disregard for the law. And why? To hide the fact that the regulation would have a terrible effect on U.S. economic performance and could drive several hundred billion dollars out of the U.S. economy. Clearly, throughout this process the commissioner demonstrated his willingness to put the interests of European tax collectors above the interests of the American people and jeopardize an already weak economy.

Rossotti's legacy also includes numerous fishing expeditions undermining the Constitution's guarantee that government cannot investigate our private affairs unless it has sufficient evidence to obtain a warrant. His most recent campaign took place last April when the commissioner decided to target American taxpayers who use credit cards issued by foreign banks. To that effect, the IRS requested and received 1.7 million records from American Express and MasterCard that involved more than 230,000 credit cards issued by banks in the Bahamas, the Cayman Islands, and Antigua. But that was not enough. The agency next went after Visa demanding that the company turn over millions of confidential records with the names, addresses, Social Security numbers, and telephone numbers of American cardholders with accounts in 30 countries.

Was the request legitimate? No. Is it illegal for Americans to have credit cards issued overseas? No, the IRS admits that it's legal. Is this because the IRS has proof that these American credit-card holders are tax evaders? No, the IRS has no proof of illegal activity. In other words, the IRS — under Rossotti's reign — had no problem making a mockery of the Constitution's presumption that people are innocent until proven guilty. In fact, the assumption is that anyone rich or with an offshore credit card — or, even better, rich with an offshore credit card — is involved in tax evasion.

But before he goes, Rossotti told the New York Times that "the I.R.S. needs $1.9 billion — an increase of 51 percent for its enforcement budget — and authority to hire 29,306 more people, on top of the 48,000 it already has in compliance and enforcement." In other words, he wants more taxpayer money supposedly to fight tax evasion.

Sadly, the commissioner forgets that good tax policy and low tax rates are far better ways to fight tax evasion. Instead of blaming tax havens and financial privacy for tax evasion in America, IRS officials should take a look at the facts. In 1999, taxes at all levels already consumed nearly 38% of the average dual-income family's income, and taxes today may be consuming an even greater share of the economy's output.

Also, the tax code today is outrageously complicated and unfair (45,662 pages that require taxpayers to choose from 703 different forms), drastically increasing the cost of compliance. High taxes — and a tax code that punishes saving, investment, and work — give taxpayers an incentive to shift their activities to low-tax countries. That is the problem we should fix. But the IRS has no interest in tax reform because tens of thousands of bureaucrats would lose their jobs if we had a simple and fair flat tax.

If the Bush administration and Treasury Secretary Paul O'Neill are serious about reforming the tax system, they should appoint someone who understands these simple facts. Then, less money will be wasted and our right to financial privacy will be restored.

— Veronique de Rugy is a fiscal policy analyst at the Cato Institute.