Malo periculosam, libertatem quam quietam servitutem.



April 2015

FATCA Reporting System Leaves Taxpayer Data Vulnerable

Written by , Posted in Taxes
Originally published in Cayman Financial Review

After years of upheaval in the financial sector, taxpayer confusion, and widespread international angst, the IRS has finally unveiled its FATCA registration and reporting system. The system is known as IDES, or the International Data Exchange Service, and claims to provide “a secure web application … to transmit FATCA data directly to the IRS.”

Given the sensitive nature of the data involved, security is of paramount importance. Unfortunately, the track record of the U.S. government and the IRS suggests individual taxpayer data will be extremely vulnerable.

At issue is FATCA’s requirement that banks essentially spy on their U.S. customers and report a wide variety of detailed information to the IRS. The reporting requirements create multiple new sources of vulnerability for individual financial data thanks to the government’s inability to keep its technology up to date, the incompetence of its personnel, and the tendency of IRS bureaucrats to abuse their positions to punish political opponents.

Poor government record on cybersecurity

When it comes to cybersecurity, the record of the U.S. government can only be described as atrocious. Consider just a few recent events.

In 2012, sensitive infrastructure data on the nation’s 85,000 dams was taken from an Army Corps of Engineers database. A National Weather Service employee with ties to the Chinese government was later indicted for downloading restricted information that intelligence officials warn could be used to maximize the loss of life and property in a hypothetical attack on American infrastructure.

The next year, the Emergency Alert System was hacked and used to warn Americans of a zombie outbreak. Stations in several states interrupted programming to report that, “Civil authorities in your area have reported that the bodies of the dead are rising from their graves and attacking the living.”

The month after that, in a particularly ironic twist, the web server of the National Institute of Standards and Technology, which hosts the government’s database of known software vulnerabilities, was itself exploited by a vulnerability and taken out of service for several days.

All told, there have been breaches of sensitive information from systems at the Departments of Defense, State, Justice, Labor, Energy, Commerce, and Homeland Security, as well as NASA, the EPA, the FDA, the Commodity Futures Trading Commission, and the Federal Reserve. And those are just the ones publicly reported.

Despite significant increases in federal spending on cybersecurity, the rate of breaches has grown each of the last 8 years for which data is available, increasing an incredible 1,012 percent from 5,503 incidents in 2006 to 61,214 in 2013. During this time the share of breaches exposing personal data has also grown, with an average of almost 40 percent of reported cybersecurity failures potentially exposing private data to outside groups.

The IRS itself has been accused by government watchdogs of having serious vulnerabilities, and of moving too slowly to fix them.

Every year since 2008, the Government Accounting Office has identified 100 cybersecurity weaknesses at the agency. Specifically, the IRS has been faulted for routinely failing to encrypt data or for using weak methods for doing so, allowing greater access to data than workers require to perform their duties, permitting user passwords that are easily guessed, and being dangerously slow to install crucial software updates and security patches.

This record alone is enough to question the ability of the IRS to secure and protect the sheer breadth of financial records it will receive due to FATCA, but serious concerns are already being raised about IDES’ specific security protocols.

The system’s rules for encryption recommend use of Electronic Codebook (ECB) as its encryption mode. ECB is widely faulted by cryptography experts as being incredibly weak, as it encrypts blocks one at a time and it thus does a poor job of hiding data patterns. Upon discovering the IDES recommendation of ECB in its protocols, prominent security expert Bruce Schneier incredulously asked, “Are they serious?”

Apparently they are not about protecting taxpayer information.

The human element may be worse

Cyber attacks are not the only threat to the private financial data collected by FATCA. Even greater danger may lurk in the form of IRS employees. Even the most secure system won’t provide sufficient protections if the IRS itself abuses the information it receives. There’s strong reason to suspect that will happen, as the IRS has in recent years engaged in numerous activities that either violate privacy rights or represent flagrant abuses of power.

For instance, the agency for years has been embroiled in scandal surrounding accusations that Tea Party and conservative groups were targeted for special attention.

During the course of the targeting investigation, emails revealed that donor lists from nonprofit groups were obtained as part of a “secret research project” conducted by a top IRS official. Two individuals involved in both the targeting and the secret project – Lois Lerner and David Fish – also had their hard drives containing tens of thousands of emails mysteriously crash.

When emails between the two were later recovered, one was reported to say, “No one will ever believe that both your hard drive and mine crashed within a week of each other.” They got that right.

The IRS initially claimed that the data on the drives was irretrievably destroyed because backup tapes did not exist, but it took only two weeks for outside investigators to find them. The Inspector General’s (IG) office conducting the investigation reported that the IT staff responsible for the tapes claim IRS officials never even asked for them. The IRS clearly believes itself beyond the law or legal oversight.

In another case, the IRS last year admitted wrongdoing and agreed to pay $50,000 in damages for the 2008 leak to a gay rights group of the National Organization for Marriage’s tax return. The leak included the name of the organization’s major donors, among which was then-Presidential candidate Mitt Romney, and also likely the leak’s true target.

And in further demonstration of the contempt with which the IRS treats the rules and its responsibilities, a recent IG report revealed that the IRS rehired hundreds of employees in recent years who had previously engaged in misconduct, including some who had improperly accessed taxpayer data.

Given this lax attitude toward preserving taxpayer privacy, it came as little surprise when another IG report last year revealed an identity theft ring operating out of an IRS office. The employees in that case were prosecuted and convicted, but how many such abuses are never caught thanks to the mismanagement and indifference of top IRS officials to the abuse of taxpayers is anyone’s guess.


Thanks to FATCA the IRS will have at its disposal more private taxpayer information than ever before. Institutions required to report on their clients owe it to them to demand the highest security for their data, security there is little reason to believe the IRS is willing or capable of providing.

These vulnerabilities don’t even account for the IGA nations where FATCA data will first be transmitted to local governments before the IRS, which could increase the risks exponentially. FATCA, in other words, is a privacy nightmare.

For all the trouble FATCA has caused during the implementation process alone, the worst may be yet to come. To make matters worse, it looks like just a warm-up to the OECD’s more ambitious plans for global tax information exchange.



April 2015

Everyone Wants a Simpler Tax Code, Right?

Written by , Posted in General/Misc.

It seems obvious. The tax code is a complicated mess that everyone agrees should be simplified. Yet it doesn’t happen. Why not?

As it turns out, quite a few people don’t want to be rid of the current code, as I explain in this recent column at EveryJoe.

Sadly, tax code opacity and complexity is seen as a feature by the ruling class. The problem has been understood for decades yet only ever gets worse. Nothing gets done about it because politicians and the parasite class benefit tremendously from the complexity of the tax code, and as far as they are concerned, the less that you know is being taken from your wallet, the better.

First and foremost, a complex tax system makes it easier for politicians to reward their friends and allies by auctioning off loopholes in exchange for campaign dollars. K Street is filled with lobbyists that make a mint off of securing favorable tax treatment for special interests. These deals only work because no one on the outside can possibly track what any particular change to an obscure section of the byzantine tax code means in the real world.

Another significant political benefit of the withholding system is that it reduces the taxpayer anger toward Washington that would otherwise be felt during tax season. Paradoxically, some taxpayers even look forward to tax day because they will get a refund! What’s not great about getting money, right? Nevermind that it was money they worked for in the first place, and that by overpaying the IRS throughout the year they’ve effectively reduced the value of their earnings (there’s no interest from forced loans to the IRS). Yet taxpayers still perceive the influx as a positive event, and that’s good for politicians who like to tax and spend.

Find the rest of the piece here.



March 2015

Shut Up and Give Me My Coffee

Written by , Posted in General/Misc.

Would you like that with cream, sugar, or a lecture on race relations? The Starbucks CEO seems to think his customers are clamoring for the latter, as that’s what he’s offering with a campaign called ‘Race Together:’

In a video message, Schultz urges “partners” to write the phrase on their paper cups “to facilitate a conversation between you and our customers.” A USA Today supplement, set to be published March 20, includes a number of “conversation starters,” including the fill-in-the-blank question: “In the past year, I have been to the home of someone of a different race ___ times.”

Here’s a thought, how about you just shut up and give me my coffee.

That’s probably giving too much credit to the impact this PR-aimed initiative will have on most customers, but do we really need yet another conversation on race that goes nowhere? How many of these unproductive conversations must we have before it begins to sink in that obsessing over race at all times is part (though just a part) of the problem?

And must every economic transaction come attached with social and moral grandstanding, as is the current trend (with Starbucks being a prolific offender)?

One of the great values of the free market is that the incentives are toward tolerance. At times in the past that incentive has been overwhelmed by stronger social prejudices, but trade still promotes tolerance. And that’s because it allows people to interact that otherwise don’t like one another (for whatever reason). Trade strips transactions down to their core of value for value and thereby reduces social conflict.

Americans disagree with their peers on a lot of issues, and yet in most contexts it doesn’t matter. But if every economic transaction must be accompanied with exchanges of social and political values, some of those exchanges will inevitably result in unnecessary conflict. Society would become more fractured, not less.

On the other hand, here we all are talking about Starbucks. Even if it’s just to slam their CEO’s ham-fisted attempt at playing white savior, I suppose that’s an advertising win.



March 2015

Obama’s Warped Perspective

Written by , Posted in Big Government

President Obama is calling on young people to have some perspective about this whole marijuana business. When asked in an interview with Vice about marijuana legalization, their audience’s “number one question,” he went into lecture mode:

First of all it shouldn’t be young people’s biggest priority. Let’s put it in perspective. Young people, I understand this is important to you. But you should be thinking about climate change, the economy, jobs. War and peace. Maybe way at the bottom you should be thinking about marijuana.

So Obama wants to focus on issues where (he thinks) the public supports more power and control for government, and not an area where it clearly and in growing numbers wants less. Is anyone really surprised?

You have to give it to him. He is a committed ideologue. Nothing is more important than expanding the state.



March 2015

Rule of Law on Trial in King v. Burwell

Written by , Posted in Health Care, Welfare & Entitlements, Liberty & Limited Government, Taxes, The Courts, Criminal Justice & Tort

You might think King v. Burwell is just about Obamacare. To be sure, the ruling could profoundly impact the law if nothing else is done. Though depending on how legislators react, even a finding in favor of the challengers could be made to have no real impact at all.

But what will certainly have an impact is a finding in favor of the government. Endorsing their position would be a huge blow against a most basic tenet of our representative system. I wrote about this in my latest column for EveryJoe.

…If the court rules in favor of the government, it will mean that the executive branch is free to rewrite legislation despite the clear meaning of a law if they can plausibly argue that the consequences for not doing so would be negative. It is, at its core, a case about who gets to write the law.

It’s true that Congress typically gives the Treasury department more latitude than typical because of the complexity of the tax code. But where Congress has not said to fill in the blanks, Treasury must follow the law, as must any other agency within the executive branch. To allow otherwise would undermine a fundamental principle of our government: that we are a nation of laws, which are created by elected representatives.

As an example of what to expect if the court allows for erosion of the separation of powers, consider the current call by Sen. Bernie Sanders – self-described socialist – for the White House to rewrite the tax code without Congress.

He wants Obama to declare by fiat the elimination of certain “loopholes.” But what are commonly referred to as “loopholes” are really just particular policy choices made by elected leaders. They can be either good, such as those which alleviate double taxation, or bad, such as those which provide special handouts for politically favored businesses. Regardless, they are part of the tax code which Congress has created, as is their legal prerogative. If they don’t like it they should legislate a new tax code, and if we don’t like it we can vote them out of office.

…This White House has been open about its desire and willingness to rewrite the law as Obama sees fit in order to advance his agenda. And his spokesman responded favorably to Sen. Sanders suggestion, saying that Obama is “very interested” in unilaterally hiking taxes. If the court rejects the latest challenge to Obamacare and finds in favor of the government, it will only serve to embolden his efforts to unconstitutionally transform the nation.

The whole piece is available here.



February 2015

Safety is Overrated

Written by , Posted in Big Government, Culture & Society, The Nanny State & A Regulated Society

Modern obsession with risk avoidance is threatening our liberty and harming the development of future generations. I explain in my most recent column at EveryJoe:

Society overrates the prevalence of criminal and physical dangers to children, so parents fail to realize that it is the relative safety of their own children in their day-to-day activities that even allows them to obsess about the smallest of dangers. The playground equipment that many of us grew up on and survived just fine, for instance, is being torn down or cemented into place by panicked governments, and replaced with safety-first boregrounds that no child wants to use.

Aggressively trying to eliminate all risk that children face is likely to create more problems than it solves. Overzealous government bureaucrats and helicopter parents that refuse to grant their children any independence are doing the next generation a disservice. Obsessing over even tiny risks leads to decisions that deprive children not only of fun, but of opportunities to learn independence, confidence, and self-reliance.

It’s not just little kids we’re coddling, either. Universities – once a bastion for free wheeling debate, intellectual confrontation, and experimentation – are increasingly stifling debate and insulating students from any difficult experience by insisting on so-called “safe spaces.”

Today, any time an event features a speaker that doesn’t toe the politically correct, “progressive” line, it faces ritual denunciation by students and faculty alike. Assuming a speaker is not outright disinvited, the event may be accompanied by school administered “safe spaces” and counseling services for student traumatized by the mere presence of different views, as happened last year at Brown when a debate participant had the audacity to oppose the dubious rape culture narrative.

You can read the rest here.



February 2015

Is Government Sanctioned Theft on the Chopping Block?

Written by , Posted in General/Misc.

The government gets away with a lot that clearly violates the rights of the people. My most recent column at EveryJoe considers whether it might be getting away with a little bit less in the near future.

First, the good news. The Supreme Court agreed to hear a case that could have significant impact on property rights. It’s brought by California raisin farmers who were fined massive amounts by the government simply for selling their crop. You see, in America – the land of the free and the home of the brave – it’s rarely ever true that you can juts make a product and sell it. You must jump through hopes to produce your goods, then jump through more to sell them.

…Raisin farmers were promised a return on their forced contributions, but over time saw ever dwindling returns. In 2003 the government confiscated 47% of their crops and provided zero compensation. Let me say that again. The government stole nearly half of all raisins produced without compensating farmers at all.

…When it hears the case later this year, the Supreme Court has the opportunity to breathe life back into the Takings Clause and make clear that the law does not allow for such blatant government theft.

The other bit of positive news comes from an unexpected source. As one of his last acts as Attorney General, Eric Holder recently announced new restrictions on civil asset forfeiture, which allows police and prosecutors to take money and property from citizens never convicted of a crime if they can plausibly argue a tangential relation of the property to a suspected crime. It is then put on the citizen to prove their innocence, or more specifically, the innocence of their property. And I kid you not, the government actually “charges” the property in question, which results in bizarre case names like United States v. $124,700 in U.S. Currency or Nebraska v. One 1970 2-Door Sedan Rambler (Gremlin).

…In apparent response to this growing awareness, Holder’s order declared that “Federal adoption of property seized by state or local law enforcement under state law is prohibited.

But there are some important caveats to both pieces of news, which you can find out by reading the whole thing here.



January 2015



January 2015

The Carbon Tax Schism

Written by , Posted in Taxes

The center-right tends to be united on issues of taxes. We’re against them. But there’s a push from some among this coalition – like the R Street Institute, and the newly formed Niskanen Center – to put a tax on carbon. Do they think Americans need to be taxed more? Have they been bought out? Have they suddenly gone insane? The answer to all three is absolutely not. Their arguments are based on the presumption that burdens can be shifted from economically destructive taxes like those on income and capital and put on far less destructive, and perhaps even beneficial, taxes like those on carbon. In theory I agree, but political reality must be taken into consideration.

The economics are sound. The politics are not. The problem is that any gains would only last until the next Democratic majority, which would raise the income/capital taxes right back to their previous level or higher. Then we’ll have our current taxes plus a carbon tax. And that’s a step back, not forward, for advocates of limited government.

I explain more in depth in my recent column for EveryJoe:

To understand where they go wrong, we must first consider the case for a carbon tax. Obviously, supporters start from the assumption that carbon is bad and that we want less of it; if they thought otherwise we wouldn’t be having this discussion. In economic parlance, they identify carbon production as a negative externality, meaning it places costs on those not involved in the economic transaction from which it was produced…

The most market-friendly solution … is the Pigovian tax. Simply put, by taxing activities responsible for negative externalities, market participants are forced to price in its full costs, thereby reducing supply and correcting a market inefficiency.

…After carbon taxes are collected, conservative supporters argue they can be used to reduce other, more destructive taxes. As mentioned, when you tax something, you get less of it. This means that taxes on things that are good – like work, savings or investment – are particularly harmful to the economy. Replacing taxes on good things with taxes on bad things thus makes a lot of economic sense. Unfortunately, it’s just not that simple.

You can read the rest here.



January 2015

Celebrating Gridlock

Written by , Posted in Big Government, Liberty & Limited Government, Waste & Government Reform

There was, predictably, a lot of end-of-year handwringing about Congressional gridlock and a lack of legislative productivity. In my recent column at EveryJoe, I explain why we should be celebrating gridlock instead of whining about it.

Chastising a session of Congress as “unproductive” due to gridlock has become a sort of tradition for statist media. Whenever a new year roles around, columnists and editorial boards begin wagging their figurative fingers at Congress for failing to meet some arbitrary threshold of activity, before sagely calling on the next session to do better.

…These arguments are not new. The same stories were written last year, and the year before that, and the year before that. They are also fallacious, suffering from flaws both logical and methodological.

…The whole exercise comes off as little more than poorly disguised concern trolling, where those with ideological axes to grind seek to discredit opponents without having to engage in the messiness of debating what policies are right or wrong.

You can read it all here.