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Fix our tax headaches

Story highlights

  • Tax system under scrutiny due to IRS scandal, Apple's corporate tax practices
  • Julian Zelizer: Something good can come out of these controversies
  • It's time to clean up the tax code and institute reform, Zelizer says

Something good can come of the bad news about taxes. Last week there were more revelations about who knew what, and what actually occurred, when the Internal Revenue Service targeted conservative organizations that were seeking tax-exempt status. Former IRS Commissioner Doug Shulman told Congress he was "dismayed" about what had happened.

Taxes were front and center once again when Apple CEO Tim Cook was forced to respond to a congressional report that the company had avoided paying billions of dollars in taxes.

The controversies generated a big stir in Washington and the news media, though it is unclear that the general public is quite as interested as the politicians and the reporters. Nonetheless, at least for now, both stories have produced intense congressional investigations to find out who was responsible for any wrongdoing.

While investigations to determine whether laws were violated and who should be blamed are important, it is also crucial that Congress use these moments as opportunities to reform processes and laws that are broken.

Julian Zelizer

Having a tax system that retains strong legitimacy among the public is essential. After all, taxes are the lifeblood of our federal government, providing the funds necessary to keep citizens safe and to provide needed services lacking in the private sphere. The more the government can do to create the impression that the system is working well, the more confidence we can gain in our government on the right and the left.

In the past, tax scandals have led to substantive reform. There have been moments when stories about wrongdoing within the IRS have led to restructuring and reorganization that improved the basic operations of the agency. Following the revelation that bribery, kickbacks and other kinds of corruption had been taking place in the IRS during the 1940s, Congress imposed stricter civil service rules to govern bureaucrats in the agency.

    In response to news about cases in which tax agents were aggressive in their treatment of taxpayers in the mid-1990s, Congress passed a reform in 1998 that reorganized the IRS, creating an oversight board, and imposed much stronger restraints on IRS agents to make them more accountable to citizens.

    New revelations about how individuals and organizations abuse the tax code through exemptions, deductions and loopholes has also produced reform. During the mid-1980s, there were a slew of stories about how wealthy Americans escaped their tax obligations while average Americans were required to pay more.

    Reformers used the concept, born in the 1960s, of "tax expenditures" to explain the multiple ways in which the federal government provided social welfare by freeing people of their tax obligations.

    Through a bipartisan effort in 1986, Congress reformed the tax code by cleaning out many of the loopholes that existed. President Ronald Reagan called the legislation a "sweeping victory for fairness." While the reforms came undone gradually over the next decade, the legislation did mark a shining example of how both parties could, under the right conditions, join forces to support the general interest over private interests.

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    Finally, there have been moments when scandals involving the government treatment of political organizations has produced reform, not simply media frenzies. In 1907, in the wake of stories revealing the sordid connection between money and politics, Congress passed a law that prohibited corporations and banks from contributing to the campaigns of federal officials.

    In 2002, Congress passed another reform that made it illegal for business and unions to use their funds for "electioneering" purposes within 30 days of a primary or 60 days before an election. The McCain-Feingold reform targeted campaign ads that aired on television. All of this came totally undone with the Citizens United decision.

    Tax reform is always extraordinarily difficult to accomplish, even though the issue draws support from liberals who seek to create a fairer system and conservatives who want a more efficient system. The problem is that the status quo is powerful.

    There had been talk about tax reform during the budget battles as a method for raising revenue that did not require raising tax rates. But those discussions faded. There are vested interests, both organizations with financial power and bureaucrats, who don't want anything to change. Scandals such as these have the potential to change the equation, by creating political pressure on elected officials to do something to the system upon which they thrive.

    What kinds of reforms are needed now? The first area that needs reform is our tax code. Without question, the reforms of 1986 have come undone. Legislators have filled the code with too many loopholes, exemptions and deductions that cost the government huge amounts of revenue and are unfair. The time has come for another round of reform, going through the tax code to eliminate provisions that allow individuals and organizations to escape their obligations.

    The second reform has to do with the exemption for political organizations that is at the heart of the ongoing story. The good news is that the revelations have already triggered discussions about why these organizations receive exemptions and what purpose this loophole serves. It is worth considering whether the loophole should be changed.

    Third, we need to make sure the IRS is adequately staffed with competent and skilled employees in local offices who won't allow these kinds of mistakes to be repeated. Finally, this scandal should trigger tighter rules against targeting particular kinds of organizations.

    Whether reform follows the scandal will depend on how much heat legislators feel from the stories coming out of Washington and whether there are leaders in the House and Senate willing to take a stand for those issues. If they do, they will take the most constructive possible actions.

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