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Impacts of Section 1706
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Jun 5, 2025
How public choice theory explains Section 1706 and led to the impacts of it. Austin Constitution meetup Feb. 22, 2010. Part 2 of 4.
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for a number of years after section 1706
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was adopted
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representatives of the large firms that
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thought they would benefit from it
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would actually work with irs agents to
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finger their small perceived competitors
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for tax audits and penalties
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often even if the contract worker had
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filed and paid his taxes or even if he
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was duly incorporated
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the object
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as it was clear from
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this
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mode of operation
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was not in fact to collect taxes that
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were not being paid
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it was to harass
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the
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companies that might otherwise
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engage such workers
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and discourage them from doing so
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by creating a risk
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perceived or actual
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that they would be audited and penalized
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often for no sound reason whatsoever
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the computer consulting business is a
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professional practice
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similar to law
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medicine or accounting
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in that most work consists
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of short-term projects
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from six months down to six minutes
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usually six minutes is the smallest
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practical billing period it's one tenth
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of an hour
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the high cost of administering another
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two employee
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makes it unfeasible
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to do so for periods of less than six
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months
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so such work only makes sense as
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contract work
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done by professionals
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who typically have multiple clients
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even at the same time
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the adoption of section 1706
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in
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1986
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had an almost immediate impact
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within a few years
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most smaller computer consulting firms
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went out of business
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most solar practitioners found they had
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to give a contract to a broker or an
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agency even if they found the work
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themselves
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and worked as a w2 employee
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with the agency paying them as little as
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half of what it built a client
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some tried incorporated
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incorporating and that helped some
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but not enough
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because the irs would often ignore the
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incorporated status of workers
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an informal survey of computer
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consultants during the 1990s found
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the cost of earning in earnings
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averaged more than
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one hundred thousand dollars per year
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each
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or more than two million
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for a 20-year
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career it is estimated that about 300
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000 such workers were affected
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for a total perhaps greater than 30
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billion dollars per year
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or a loss of perhaps 10 billion per year
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in tax receipts
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one of the effects of this
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section 1706
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is that small contracts went underground
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increasingly clients desperate to get
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work done
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would conceal their expenditures for
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such work
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or pay in cash or not report it or take
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the deduction
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and ask the contractors not to report
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the earnings
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which can be traced back to the client
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the result was to drive much computer
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computer consulting underground
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and consultants
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who have been more tax compliant than
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almost any other profession
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join the ranks of occupations
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like home
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and landscaping or sex services
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it can be estimated this caused the loss
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of tax receipts of more than 20 billion
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dollars per year
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or the work went undone it is difficult
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to estimate the damage done with clients
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by not allowing them to do critical
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computer work
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but many small businesses and some large
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ones
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operate on the edge
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and their inability to get such work
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done
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at an affordable cost
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has likely contributed to contributed to
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countless business failures during the
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decades since 1986
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such potential clients were never
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prospects for the firms behind 1706
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in seeking to corner the market
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they actually only succeeded in
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destroying the market for a people who
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would not have
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brought them work
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anyway
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i think all they did was poison the well
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it also contributed to the dot-com
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collapse
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what precipitated the bursting of the
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dot-com bubble was mainly the suspension
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of further funding by venture
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capitalists before completion of their
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original business plans could have made
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them profitable
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and a leading cause of their inability
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to achieve profitability
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was their inability to engage contract
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computer workers due to section 1706
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informal surveys of many of the firms
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support this explanation
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surveys have also indicated that
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increased costs risk and uncertainties
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brought by section 1706
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have greatly contributed to the
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inability of smaller u.s firms to
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compete in rural markets
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union contracts and health insurance may
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have done that for large enterprises but
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it is easy to overlook that most
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international trade involves smaller
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firms who are more affected by
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regulatory and tax factors
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we can estimate the impact on our
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balance of payments deficit to be as
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high
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as 10 billion dollars a year
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from this cause alone
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informal surveys
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of executive firms who have been
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offshoring jobs
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confirms that a leading
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factor in their decisions
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has been the risks costs and
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uncertainties introduced by section 1706
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it's difficult to add this aggregate
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all the factors
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but the fact they mention it so often
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without being prompted
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suggests it is a major factor
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perhaps at more than 10 percent of the
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jobs lost to other countries
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where some estimate to run
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as much as 400 000 jobs a year
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20 of that
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would be 40 000 multiplied by average
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earnings of 60 000 per year
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or 2.4 billion lost to the economy
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and
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about 204 million to tax receipts
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section 1706 is not unique
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most regulations and taxes whatever the
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reasons given for them by public
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public consumption
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are mainly designed to suppress small
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competitors of larger enterprises
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and therefore to achieve
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an advantage for them
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they could not have it obtained in a
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free market
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however it is one of the easier to
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identify and analyze
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it has not just been computer
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consultants who have been armed but all
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of us
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now there are several approaches have
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been
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attempted
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over the decades and centuries
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to counter undue influence
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of special interest groups
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the first embedded in our constitution
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is a separation of powers and checks and
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balances
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the founders attempted to
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reduce the
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problem of
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undue influence of special interests by
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separating power
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dividing it
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and
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putting it in opposition to
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each other
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in ways that they hoped
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would
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prevent
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too much power
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from being too concentrated or
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unbalanced
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