The IRS scandal is now over a month old and, while new revelations are coming to light each day, we still don't know how high up the corruption goes. Did someone tell former Commissioner Douglas Shulman to use the awesome power of the federal government against groups that wanted to criticize it?
The simple answer is yes, but we don’t need to look for any smoking guns to figure that out. All we have to do is read our laws and listen to what the loudest voices in the media and politics have been saying for years. We have a legal and political culture that increasingly wants a regulated marketplace of political ideas — and it shouldn't surprise anyone that this is the case.
Start with the laws. The tea party groups the IRS scrutinized were applying for nonprofit status under section 501(c)(4) of the tax code as “social welfare organizations.” Social welfare organizations are not taxed on the money they raise the same way a corporation is taxed on the money it earns. Donations to social welfare organizations are not tax deductible to the donor. They are allowed to spend some of their money on political speech, but not the majority of it. If they spend most of their money on political speech then they must register under section 527 of the code, which is the section used by political campaigns, and they must disclose their donors.
So what qualifies as a social welfare organization and how are they distinguished from political organizations? The short answer: Who knows? These are inherently subjective questions that turn largely on the intentions of the organization. The only way to figure this out is to do what the IRS did to tea party groups — conduct a long investigation of their actions, intentions, and connections: read everything they have said and try to decide whether their “true” purpose is to further a “political” goal or a “social” one.
This inquiry is entirely in the eye of the beholder. If you share the tea party’s small government agenda, you will probably think that they are out to improve society. If you disagree with their mission — as it appears most of the agents in Cincinnati office of the IRS did — then you will likely conclude that they are out for crass political gain and not acting in the interests of “society.” There is no objective distinction between “political speech” and “social welfare” speech, so basing a legal distinction on those vague categories can only lead to complicated tests, endless investigations, and ultimately arbitrary and often biased results.
And that’s exactly what we have had for the last three decades. In the 1970s, the Supreme Court established the “express advocacy” test, which tried to distinguish between political and other types of speech based on whether the speaker told people to vote for or against a candidate in “express terms.” Predictably, groups that wanted to avoid the significant regulations and restrictions in campaign finance law just avoided using words like “vote for” or “vote against.” Just as predictably, supporters of campaign finance laws complained and courts started coming up with more “functional” tests, which turned not on so-called “magic words” but on the intentions of the speaker. This led to vague legal criteria and endless investigations like the ones the IRS launched against tea party groups.
By 2010, when the Supreme Court decided the Citizens United case, the Federal Election Commission had adopted 568 pages of regulations governing political speakers and about 2,000 additional pages trying to explain them. The rules defined and regulated 71 distinct entities and 33 different types of political speech. Political speakers had to navigate all these rules to figure out what they were allowed to say, when they were allowed to say it, and what legal obligations applied to them when they did.
Seemingly fed up with this morass of legal rules, the Court refused to tinker with them any further and struck down a law that banned corporations from spending their own money on political speech. Campaign finance scolds reacted as they had for decades — they went apoplectic and called for more regulation. Barely a week passed without the New York Times, Washington Post, and many other voices in the media and politics carrying on about “shadowy groups” that were wielding too much influence with all of their “dark money.” The targets were typically conservatives like Karl Rove, libertarians like the Koch brothers, and business groups that wanted less government.
Rarely did anyone point out that all of this money was not being spent on contributions to candidates, but on speech advocating a point of view about politics and policy. Yet the calls to investigate and often to prosecute these groups were relentless. The message was clear: Special interests advocating smaller government are corrupting the democratic system.
Should it surprise us that the IRS took action and investigated some of the groups? The loudest voices in the media and in politics had been telling them to do just that for years.
Supporters of this scrutiny claim that 501(c)(4) groups are taking advantage of the tax laws. If they want a tax exemption, according to this argument, they should pay for it by disclosing their finances and their donors.
But this argument ignores the structure and logic of the tax laws. Groups that are funded by donations from others are not cheating the system or receiving some gift from society when they establish themselves as nonprofits. They are acting in a way that is both logical and legal under our tax laws.
Any system of taxation has to distinguish between what is taxed and what isn’t. Ours, by and large, turns on whether you earn income. Business corporations do, so they are taxed as for-profit entities. Social welfare nonprofits survive on money donated from others, which is taxed when it is earned by the donor. Unlike educational and philanthropic nonprofits, which are organized under section 501(c)(3) of the tax code, donations to social welfare groups are not tax deductible for the donor. So the tax code quite logically does not require nonprofits to pay taxes on that money again, when it is donated to the group. Nonprofit status is no more a gift to social welfare groups than it is a gift to you for the government not to tax every one of your bank accounts every time you deposit money into them.
Those who have lodged this criticism never say what the tea party groups should have done differently. Should they have organized themselves as for-profit corporations when they are not operating for a business purpose? Should they have registered as “political committees” even though they were not planning to spend a majority of their funds expressly advocating the election or defeat of candidates?
Doing any of these things would not have changed the debate at all. Corporations pay taxes and yet they were banned from spending that money on political speech until the Supreme Court struck down those laws in Citizens United. After the decision, critics called for new laws requiring corporations to disclose their political spending. They were not deterred by the fact that corporations pay taxes. And long before Citizens United came along, supporters of campaign finance laws were calling for more regulation of “527s” because they were allegedly spending too much money on political speech. Remember the Swift Boat Veterans for Truth? They did what many critics are claiming the tea party groups should have done — they registered as political groups under section 527 of the tax code and complied with the disclosure laws. But they were still widely pilloried as a dark, shadowy group with too much political influence. The proposed solution was, of course, more regulation.
Whatever the question, a growing segment of the culture thinks the answer is always more regulation of political speech. Do you tell people what candidate to vote for? You should be regulated. Do you avoid telling people what candidate to vote for? You are a liar; you really want to tell people which way to vote, but aren’t admitting it. You should be regulated. Do you spend a lot of money on political speech? That level of spending is grotesque. You should be regulated. Do you spend only a little? The laws are working. Let’s pass more of them. Are you a nonprofit that pays no taxes? You’re getting a gift and should be regulated. Are you a for-profit entity that does pay taxes? You’re distorting democracy and should be regulated!
It’s time we realized that the tax and campaign finance laws that apply to political speakers are designed to prevent people from speaking effectively and that many opinion leaders want to use them to do just that. If we want to prevent another scandal like this from happening — and more importantly, if we want to protect our ever-dwindling right to freedom of speech — we need to recognize that we can have freedom of speech or we can have a regulated marketplace of ideas, but we cannot have both.