Good morning. My name is John Berthoud. I am President of the National Taxpayers Union, a nationwide grassroots lobbying organization of taxpayers with 300,000 members. NTU was founded in 1969, and we have long fought for both taxpayer rights and taxpayer relief. With citizens working into the middle of May just to pay what they owe government, we believe we desperately need to start shrinking the size of government and cutting taxes.

Our educational and research sister organization -- the National Taxpayers Union Foundation -- was founded in 1977. Further information on the work of both organizations can be found at our web site, www.ntu.org.

I come before you today to state NTU’s views on privacy issues for taxpayers in the information age.

The Internet and the information age generally are a great boon to taxpayers. We have all marveled at the stunning growth of the Internet. From 1993 to 1997, the number of Internet users surged from fewer than 5 million to more than 62 million.¹ Some predict that online sales could reach $1 trillion by the turn of the century.

As the nation’s economy benefits from higher productivity and growth because of exciting developments in technology, Americans benefit both as consumers and as taxpayers. If tax coffers swell because of higher economic growth due to the technology sector, then taxpayers should get some well-deserved relief. Indeed, NTU has strongly supported Congressional efforts to return budget surplus dollars back to their rightful owners -- American taxpayers. NTU and our allied state and local taxpayer groups have supported similar efforts by State Legislators and Governors.

Beyond fostering economic growth, technology can help citizens in navigating through the maze of government. Almost all citizens have some dealings with either the IRS or a state or local tax agency. Thus, it makes sense to marshal technology to help citizens in their interactions with these agencies.

Under the leadership of Commissioner Gavin, Connecticut seems to be doing many positive things with its web site. For those of you who have not been to their web site, it is well laid out and contains a lot of useful information for taxpaying businesses and individuals. The National Taxpayers Union feels that Connecticut’s tax system was superior prior to adoption of an income tax. When he was campaigning in 1994, Governor Rowland pledged to eliminate the income tax, although so far he has taken no action to further this goal. So if the state is to have complex taxes such as the income tax, this added assistance to taxpayers is most welcome.

Using the Internet and providing written information and answers to taxpayers’ questions is particularly important in light of the spotty record of tax agencies in recent years in providing help via telephone. For example, a recent analysis of the IRS help line revealed a stunning 11 percent error rate. And official forms and publications remain complex, confusing, and in need of clarification. Indeed, IRS Commissioner Charles Rossotti was recently quoted as saying that the IRS is "still sending over 100 million notices per year to taxpayers that often only a tax lawyer could decipher or love."³ Having detailed information and accurate answers to questions available on a web site will help both business and individual taxpayers deal with complex forms and notices.

With all the opportunities presented by technological change, taxpayers also face great challenges. It is an old axiom that information equals power, and thus, it is critical that parameters be placed on the government’s use of information and that there is constant vigilance as technology expands and changes. The fight to maintain privacy and limits on government intrusiveness is a core part of the ongoing struggle against overreaching government. As Cato Institute legal analyst Solveig Singleton argues, "Privacy remains important as a check on the unique powers of government."⁴

While we applaud the use of the Internet as an information resource for taxpayers, we are more skeptical of Connecticut’s publication on the Internet of tax delinquency information.⁵ While NTU strongly feels that taxpayers should obey the law, we are troubled by the almost carnival-like element of this approach to the serious business of tax collection.

Taxpayers have faced a continual struggle against excesses of federal and state tax collection agencies. We fear that this type of program could only foster abusive behavior by agency officials. In the mid-1980’s, hearings on the IRS revealed such horror stories as a sign on a manager’s door that read "Seizure Fever --Catch It."⁶ An agent in Baltimore, Maryland reported that agents were rewarded for having the best collection records.⁷ Given the problems that taxpayers have faced year in and year out, it is all too easy to envision how a program such as Connecticut’s could, at a minimum, foster a "gotcha" mentality that could be lead to abuses.

According to the U. S. General Accounting Office, only four states -- Connecticut, Illinois, Montana, and New Jersey -- have programs in which they publicly disclose the names of individuals or businesses who are delinquent in paying their taxes. The District of Columbia also operates such a program.⁸ GAO could produce no hard data to show that there is any increase in collections from these systems. The only evidence they could produce was non-scientific:

Revenue office officials believe that their public disclosure programs improve compliance. They base their views mostly on anecdotal evidence from statistics on accounts receivable and collections.⁹

 

So we have a program with no measurable upside, but with a possibility that it could foster the wrong attitude among tax collectors. But further, tax agencies will make mistakes -- sometimes far too many. Above I cited statistics on IRS errors on tax help via their 800 number. Another example would be the many errors in an IRS program that actually provides rewards for people to testify against family, friends, and associates. There have been many cases of people being falsely charged. The false charges and attendant adverse publicity have been devastating to these individuals.

So although the Connecticut program has generated a lot of media interest, NTU sees many downsides and no demonstrable evidence of benefit.

There are important federal implications for our assessment of state programs such as Connecticut’s. The Internal Revenue Service Restructuring and Reform Act of 1998 mandated that the Joint Tax Committee of the United States Congress study whether the federal government could increase compliance by publicly disclosing names of individuals and businesses who have not paid their federal taxes.

I have stated above the problems we see with Connecticut’s program, thus we do not see this as an appropriate manner to raise federal compliance. So what can federal lawmakers do?

Unfortunately, the fact is that no matter what means are employed, our current tax system will have some degree of noncompliance. Since 1980 the IRS budget has more than doubled, but the share of uncollected taxes that the IRS says Americans legally owe has actually increased since then. The IRS has pledged dozens of times to reform itself, yet citizens still face problems.

More to the point, however, is what, exactly, constitutes a "tax deadbeat"? In the fall of 1998, at the request of Commissioner Rossotti, the IRS Advisory Council released initial findings of its investigation of reasons for noncompliance with federal taxes. Of the top ten explanations the Council uncovered, the largest three were tax law complexity, fear of filing an incorrect return, and lack of resources.

The point here is NOT that ALL delinquent taxpayers are little old ladies who’ve made honest mistakes. Rather, it appears to us that more draconian enforcement techniques, such as puritanical attempts to put delinquent taxpayers on display, won’t address the root causes of common non-compliance. Every society has criminal elements that don’t play by the rules. But a free society by and large complies with the law because of respect for the soundness of those rules, not because of fear of getting caught. Anyone who believes otherwise must also believe that every American is a thief, a liar, or a murderer, kept in the closet only by the force of the state.

The problem is that our current tax system -- centered around a multiple rate income tax with numerous exemptions -- simply puts the tax collector at odds with Americans.

The only way to increase compliance without heavy-handed tactics is to fundamentally change the tax code itself. For starters, Connecticut should abolish its income tax. The state did very well for two centuries with no income tax and can again.

Overall, we think tax codes should be simplified, taxes lowered, and complexity eased. These steps would help to enhance enforcement in ways that no punitive tax agency program could. At the federal level, NTU supports adoption of either a flat tax or elimination of the income tax and adoption of a national sales tax. Such major reform is the only way we’ll really end the bulk of the tension over taxes between government and citizens.

Technology unfortunately has led to other governmental threats to businesses and individuals. Let me mention one which I will label the "cash cow" problem. In a nutshell, many elected -- and non-elected -- government officials have recently come to see the Internet and the technology industry in general as something of a cash cow. The aims of these avaricious politicians present one of the gravest threats to the future healthy development of our technological sector.

On the tax front, we are greatly concerned that governments will rush to tax Internet commerce and in the process greatly damage this vital economic sector. Because of overlapping jurisdictions and great complexity in determining where a transaction actually took place, we don’t believe that there are easy answers in setting tax rules and have thus supported a mortatorium on Internet sales while governments hopefully figure out a rational policy.

And in an era where governments are increasingly interested in garnering revenue through non-traditional means, high technology companies have proven a tempting target.¹⁰ The most significant example is Microsoft, where the U.S. Justice Department has led a legal jihad against one of the great innovators of our age. Many states have joined this effort and are doggedly pursuing this firm in the name of antitrust, but in the hopes of grabbing millions of dollars. National Taxpayers Union Foundation Director of Programs Mark Schmidt writes in a new study:

As part of this strategy of using lawsuits to generate revenue, attorneys general in many of the states -- including New York, Ohio, Minnesota, and Utah -- are eager to use provisions in their laws that would allow them to fine Microsoft for each antitrust violation "incident," in amounts ranging from $2,000 in Kentucky to $100,000 in New York. Representatives of several attorneys general suggested that they hoped that every purchase of Windows would be considered an antitrust violation. "With per violation or per occurrence, that would be millions and millions of dollars," said Doug Davis, a West Virginia Assistant Attorney General.¹¹

 

Schmidt has shown that nine out of the twelve states with the highest tax burdens (as a percent of income) -- California, Connecticut, District of Columbia, Kentucky, Minnesota, New Mexico, New York, Utah, and Wisconsin -- have joined the case against Microsoft.¹² In other words, much of the reason for pursuing Microsoft amounts to little more than an attempt to gain dollars for building even bigger state governments.

Those who work in the industry, and those who benefit from the industry -- and that means almost everybody -- must fend off these types of misguided efforts by politicians which would, in the words of U.S. Senator John McCain, "choke this baby in the cradle."

In sum, the National Taxpayers Union sees the Internet and staggeringly rapid developments in technology as greatly beneficial to the American economy and taxpayers.

The added economic growth that has accompanied the high tech revolution has benefitted all Americans. The Internet can be used by government agencies to provide information to taxpayers. Relative to years past, taxpayers thus can have greater confidence in the accuracy of the information that they receive from government (or at a minimum at least some place to point to, should their tax returns be questioned).

But there are concerns too. We don’t want to see Internet commerce choked by government regulatory or taxation schemes. And we don’t want to see taxpayer rights’ abused by the availability of technology. As we have stated, we are troubled by efforts by Connecticut, three other states, and the District of Columbia to provide information about tax deadbeats publicly. We believe Americans should obey the law and pay their taxes. However, given past excesses by tax officials and the possibility for errors, there is too great a downside and so far no real demonstration of any upside.

Thank you.

1 Lester A. Picker, "NBER Digest of 'A World Without Borders: The Impact of Taxes on Internet Commerce'" (NBER Working Paper No. 6863), 1999.

2 "Hating the Taxman," Investor's Business Daily, April 2, 1997.

3 "Internal Revenue plans to clarify notices: Better writing may clear up confusion for many taxpayers," The Detroit News, August 30, 1999.

4 Solveig Singleton, "Innovation Versus Privacy," Today's Commentary - August 13, 1999, The Cato Institute. Available at www.cato.org/dailys/08-16-99.html.

5 The Connecticut Department of Revenue Services notes, "Connecticut General Statutes Section 12-7a requires the Commissioner of Revenue Services to prepare and maintain a list of delinquent state taxes unpaid for a period greater than 90 days after all appeal rights have expired. That list, including the names, addresses, tax type and amount due (tax, interest and penalties), must be available to the public for inspection by any person." (Downloaded from the Connecticut Department of Revenue Services Web Page September 12, 1999 - www.state.ct.us/drs/delinq/augt100.html).

6 Bruce Bartlett, "Can the IRS Be Reformed?" Brief Analysis No. 250, The National Center for Policy Analysis, December 3, 1997, http://www.ncpa.org/ba/ba250.html.

7 Ibid.

8 The United States General Accounting Office, "Tax Administration: Few State and Local Governments Publicly Disclose Delinquent Taxpayers," GGD-99-165, August 24, 1999, Page 1.

9 Ibid., Page 7.

10 See Robert Reich, "Regulation is out, litigation is in," USA Today, February 11, 1999, Page 15A.

11 Mark Schmidt, "Lawyers Playing Lawmakers: The Microsoft Antitrust Suit," National Taxpayers Union Foundation Policy Paper 119, September 9, 1999, www.ntu.org/issues/taxes/tech/pp119.htm.

12 Ibid.