Solution to the IRS Mess: Eliminate the Corporate Income Tax

While everyone is quite rightly outraged by the abuses of the IRS in singling out conservative group for audits, intrusive inquiries, and endless delays on approval of their tax-exempt status, it has occurred to me that there is one simple solution to the problem that would not require nearly as much reform of the politically corrupt agency.

Get rid of the corporate income tax.

As David Rivkin and Lee Casey explained at the Wall Street Journal the other day:

The IRS crackdown on tax-exemption approvals for conservative groups was directed at nonprofit social-welfare groups, often called 501(c)(4)s after the Internal Revenue Code section granting them tax-exempt status. Such groups do not have to disclose their donors and are exempt from most taxation, although donations to them generally aren’t tax deductible.

Social-welfare organizations are permitted to engage in a range of political activities promoting their causes or beliefs, so long as these activities aren’t their “primary purpose.” This has been generally understood to mean that they must spend less than 50% of their total resources on political activities.

The IRS had little interest in 501(c)(4) political activities until the 2002 McCain-Feingold campaign-finance reform. That law barred dedicated political-advocacy groups from soliciting and spending soft money—funds that aren’t subject to tight federal campaign-contribution limits and are used for issue advocacy and party-building . . . .

Yet McCain-Feingold had the unintended effect of making 501(c)(4) political activities far more important than they had been, since the law’s ban on soft money doesn’t apply to such groups . . . .

So the entire hang-up in the IRS bureaucracy was whether groups claiming 501(c)(4) status could deservedly claim that designation. Did they devote the majority of their resources to non-political (educational or social) activities? How to determine which activities were political? And so on, and so on. The law is a veritable invitation to bureaucratic abuse, if one is inclined to succumb to such temptations.

But the point of claiming the status is so that your incorporated 501(c)(4) “social welfare organization” doesn’t have to pay corporate income taxes on the money it raises. If there were no corporate income tax in the first place, the issue simply wouldn’t arise.

It would, of course, be a nice bonus that eliminating the corporate income tax (which many economists believe is a deeply stupid form of taxation anyway) would give a nice boost to the economy. As one also learned in the Journal this week, America’s high corporate tax rate leads to all sorts of nonsense that intelligent lawyers and accountants have to cope with as creatively as they can. If we suddenly had the world’s lowest corporate rate—-zero—-in the world’s largest economy, imagine the effects.

So just get rid of it. No more corporate income tax, no more worries about which corporations have to pay it, and no more proctological exams from the IRS about what degree of “politics” people are engaged in under the corporate form.

The only question that would remain is whose donors get the charitable tax deduction now allowed under section 501(c)(3). I would extend it to any nonprofit—-even to the two great political parties—-and eliminate the “Johnson amendment” barring 501(c)(3) entities from engaging in lobbying and electoral politics. That’s of dubious constitutionality anyway, especially as applied to the question of “pulpit politics” in churches.