Last year, The Heritage Foundation
released a publication, "577,951,692,634 Reasons...And Counting:
Why a Flat Tax Is Needed to Reform the IRS." Since that time, calls
to reform the Internal Revenue Service have led to unprecedented
hearings in Congress and outcry among the public. In 1997, however,
Congress moved away from reform and approved a tax bill that adds
even more complexity to the tax code. Because of that bill, as well
as Heritage's continued research into the myriad nooks and crannies
of the current tax code, 159,783,249,224 new reasons that the
Internal Revenue Code should be replaced with a flat tax have come
to light, bringing the total number of reasons to
737,734,941,858.
The
Internal Revenue Service (IRS) frequently is cited as the most
hated of all government agencies. This aversion goes well beyond a
simple dislike of paying taxes. Many Americans feel the IRS uses
its vast powers capriciously to enforce a tax code that is unfair
and incomprehensible. Indeed, a 1997 national voter survey finds
that the majority of respondents would prefer to undergo a root
canal than be audited by the IRS.1 And a 1990 magazine
survey finds that the most frightening words people could imagine
hearing when they answer the phone are "This is the IRS
calling."2 Although Americans have
every right to be upset by an oppressive tax system, their anger
should not be directed at the IRS. The vast majority of problems
with the current tax system are the inevitable result of bad tax
policy.
The way to reduce the intense popular
aversion to the IRS is to enact a flat tax. By wiping out all the
complicated, obscure, and convoluted provisions of the current tax
code, a flat tax will reduce compliance costs and ease the
uncertainty and anguish that make April 15 everyone's least
favorite day of the year. In the words of former IRS Commissioner
Shirley Peterson, who directed the agency in 1992, "We have reached
the point where further patchwork will only compound the problem.
It is time to repeal the Internal Revenue Code and start
over."3 As reported in The
Wall Street Journal last year,
A
recent survey of 275 IRS workers around the nation, done by a
national IRS restructuring commission headed by Senator Kerrey of
Nebraska and Representative Portman of Ohio, found overwhelming
support within the IRS for simplifying the law.4
As
the following enumeration demonstrates, almost all the reasons
cited for frustration with the IRS really constitute arguments
against the tax laws approved by politicians over the past
80 years--and for a fair, simple, flat, tax.
THE FEDERAL
GOVERNMENT AS A TAX GOLIATH
The
IRS is not only the most feared of government agencies, it also is
one of the biggest and most expensive. The agency has more
employees than the Central Intelligence Agency, Federal Bureau of
Investigation, and Drug Enforcement Agency combined, and its budget
makes it a bigger consumer of tax dollars than the Departments of
Commerce, State, or the Interior.
The
Numbers Speak for Themselves
WHAT IS A FLAT TAX?
A flat tax contains three core features, each designed to fix a
major problem with the current tax code. These key features can be
summed up in a single sentence: "All income should be taxed at one
low rate and only one time, and the tax should be collected in the
least intrusive way possible."
A single flat rate. Under the flat tax, income is taxed
at one low rate. This insures that taxpayers are treated equally
while addressing the problem of high marginal tax rates. It also
promotes faster growth by minimizing the tax penalty against work,
risk-taking, and entrepreneurship.
No bias against savings and investment. A flat tax
eliminates the current code's bias against capital formation by
making sure that no income is taxed more than one time. Because
double taxation of capital income is a pervasive problem under
current law, this reform will stimulate higher incomes and faster
growth by minimizing the tax penalty on savings and investment.
Simplification. The flat tax eliminates provisions of the
current code that result in tax preferences or tax penalties on
certain behaviors and activities. In addition, a large amount of
income is taxed at the source rather than at the recipient level,
dramatically lowering paperwork and compliance costs. These changes
would solve the problem of complexity, allowing taxpayers to file
their individual returns on postcard-size forms. It would also
guarantee that the tax code treats everyone equally.
|
New Evidence
12,000 = The number of
additional IRS employees needed to answer phone
inquiries from confused taxpayers during tax filing
season.5 Because taxpayers will
need to know only the amount of their wages and the size of their
families under a flat tax, additional personnel will not be
needed.
$1,000 = The
hourly collection quota placed on IRS agents
auditing individual taxpayers in the San Francisco office.6
Although collection quotas violate the law, the current system is
so complex that the IRS assumes mistakes will be found on every
return. Errors will be very few under a simple and transparent flat
tax.
62,000,000 = The number
of lines of computer code required by the IRS to
manage the current tax code.7 A simple flat tax will ease
the IRS's ongoing computer problems dramatically.
1,420 = The number of
appraisals of works of art that an IRS panel
performed in order to tax the assets of dead people.8
Because double taxation under a flat tax does not exist, the
absurdity of having the IRS value art would disappear with the
death (estate) tax.
3,200 = The number of
threats and assaults IRS agents experienced over a
five-year period.9 A fair and simple tax
system will reduce taxpayers' frustrations dramatically.
What
We Already Knew
136,000 = The number of
employees at the IRS and elsewhere in the
government who are responsible for administering the tax
laws.10 Because the number
needed is dictated by the complexity of the tax code, fewer
personnel will be needed under a flat tax, and the downsizing of
the IRS will save taxpayers a significant amount of money.
$13,700,000,000 = The
amount of tax money spent by the IRS and other
government agencies to enforce and oversee the tax code.11
Both taxpayers and the economy will benefit from the spending
reductions made possible by a flat tax.
17,000 = The number of
pages of IRS laws and regulations,12
not including tax court decisions and IRS letter rulings.
This page count would be reduced significantly by a flat tax.
5,557,000 = The number of
words in the income tax laws and
regulations.13 With a flat
tax, there will be no need for a tax code that is nearly seven
times longer than the Bible.
The IRS
Paper Machine
With
so many employees, so much money, and such a cumbersome tax code,
it should come as no surprise that the IRS is one of the country's
biggest paper-pushers.
New
Evidence
820 = The number of
pages added to the tax code by the 1997 budget
act.14 A flat tax
will slash it to a fraction of its current size.
250 = The number of
pages needed to explain just one paragraph in the
Internal Revenue Code.15 A simple flat tax will
avoid needless IRS regulation.
271 = The number of
new regulations issued by the IRS in 1997.16
By putting an end to constant social engineering, a flat tax will
halt the IRS's constant rewriting of the tax rules.
261 = The number of
pages of regulations
needed to clarify the tax code's
"arms-length standard" for international intercompany
transactions.17
569 = The number of
tax forms available on the IRS Web
site.18 Only two
postcard-size forms will be necessary under a flat tax: One for
wages, salaries, and pensions, the other for business income.
What
We Already Knew
31 = The number of
pages of fine print in the instructions for
filling out the "easy" 1996 1040EZ individual tax form.19
By contrast, individuals will need just one page of instructions to
fill out a flat tax postcard.
8,000,000,000 = The
number of pages in the forms and instructions the IRS sends
out every year. Under a flat tax, the postcard-sized forms
are virtually self-explanatory.20
36 = The number of
times the paperwork the IRS receives would circle the
earth each year.21 Complexity and
paperwork will all but vanish under a simple flat tax that treats
all citizens equally.
293,760 = The number of
trees it takes each year to supply the 8 billion pages of
paper used to file income taxes in the United
States.22 A flat tax using two
simple postcards obviously will be more friendly to the
environment.
1,000,000,000 = The
number of 1099 forms sent out each year to help
the IRS track taxpayers' interest and dividend income.23
Under a flat tax, business and capital income taxes will be
collected at the source, thereby eliminating this paperwork
conundrum.
The IRS
Briar Patch
Much
to the chagrin of taxpayers, the IRS does not focus solely on
generating paperwork. Tasked with enforcing the cumbersome tax
code, the agency has numerous unwelcome contacts with taxpayers
every year.
New
Evidence
33,984,689 = The number
of civil penalties assessed by the IRS in
1996.24 Because a flat tax will
be so fair and simple, the IRS will have little reason to go after
taxpayers.
10,000 = The number of
properties seized by the IRS in 1996.25
Part of this problem is caused by the government's trying to take
too much money from people, and part is caused by complexity. A
flat tax will reduce the government's take and eliminate
complexity.
750,000 = The number of
liens issued by the IRS against taxpayers in
1996.26 A simple, low flat tax
will result in fewer fights between the government and
taxpayers.
2,100,000 = The number of
IRS audits conducted in 1996.27
Without all the complex provisions in the code under a
flat tax, the IRS will have few returns to audit.
85 = The percentage of
taxpayers selected by the IRS for random audits
who had incomes less than $25,000.28 A complicated tax code
benefits the wealthy, who can fight back. A flat tax will be good
news for those with more modest incomes.
47 = The percentage of
taxpayers living in just 11 southern states subject to
random audits.29 Because audits
will decline dramatically under a flat tax, so will discriminatory
audit patterns like this one.
What
We Already Knew
10,000,000 = The number
of corrections notices the IRS sends out
each year.30 With a simple and fair
tax system like a flat tax, mistakes will become rare.
190,000 = The number of
disputes between the IRS and taxpayers in 1990
that required legal action.31 In a flat tax
environment, there will be few potential areas of disagreement, and
legal action will become scarce.
3,253,000 = The number of
times the IRS seized bank accounts or paychecks in
1992.32
33,000,000 = The number
of penalty notices the IRS sent out in
1994.33 Because a flat tax will
eliminate complex parts of the tax code, the number of
disagreements between taxpayers and the agency will plummet.
Do as
They Say, Not as They Do
The
IRS is quite strict with taxpayers who make mistakes, but the
following examples illustrate that it would have a hard time living
up to the standards imposed on taxpayers.
New
Evidence
15 = The number of
years the IRS believes it will need to modernize its
computer system.34 A simple, flat
tax will not require complex computer systems.
1,000,000 = The number of
Americans who received tax forms with erroneous mailing
labels in 1998.35
20 = The
percentage error rate at the IRS for processing
paper returns.36 Even children would be
able to process postcard returns under a flat tax.
6,400 = The number of
computer tapes and cartridges lost by the
IRS.37 Once a flat tax is
implemented, these tapes and cartridges could remain lost.
22 = The percentage of
times reporters for Money magazine received inaccurate or
incomplete information in 1997 when calling the IRS's
toll-free hot line.38 To file a return under
a flat tax, Americans will need to know only the size of their
families and the amount of their wages, salaries, and pensions;
they will not need to call the IRS.
40 = The percentage of
times Money magazine reporters received wrong
answers in 1997 in face-to-face visits at IRS customer
service offices.39 A flat tax will be so
simple that such mistakes will become almost non-existent.
$800,000,000 = The
estimated cost to update the IRS's computers for
the year 2000.40 Scrapping the tax code
for a flat tax will allow the government to institute a simpler
computer system.
500,000 = The number of
address changes made to correct the master file by
IRS employees each year.41
78 = The percentage of
IRS audit assessments on corporations that
eventually are disqualified.42 A flat tax will replace
the onerous corporate tax with a simple, postcard-based system.
What
We Already Knew
8,500,000 = The number of
times the IRS gave the wrong answer to taxpayers seeking
help to comply with the tax code in 1993 (taxpayers still
are held responsible for errors that result from bad advice from
the IRS).43 A flat tax will be so
simple that taxpayers rarely--if ever--will need to call the
IRS.
47 = The percentage of
calls to the IRS that resulted in inaccurate
information, according to a 1987 General
Accounting Office study.44 A flat tax will free
IRS personnel from the impossible task of deciphering the
convoluted tax code.
5,000,000 = The number of
correction notices the IRS sends out each year
that turn out to be wrong.45 An error rate of 50
percent will be impossible under a flat tax.
40 = The percentage of
revenue that is returned when taxpayers challenge
penalties.46 Under a flat tax,
penalties will become rare, so fewer penalties will be assessed
incorrectly.
$5,000,000,000 = The
amount of money that taxpayers were overcharged
for penalties in 1993.47 After a flat tax goes
into effect, such injustice will all but disappear.
3,000,000 = The number of
women improperly fined each year because they have
divorced or remarried.48 Taxing income at the
source under a flat tax will eliminate such travesties.
10,000,000 = The number
of taxpayers who will receive lower Social Security
benefits because the IRS failed to inform the Social
Security Administration about tax payments.49 A
simple flat tax is likely to free enough IRS time and resources to
fix this problem.
$200,000,000,000 = The
amount of misstated taxpayer payments and refunds
on the books of the IRS.50 The IRS is no more able
to administer tax laws that defy logic than is the average
taxpayer. A flat tax will rectify this problem.
64 = The percentage of
its own budget for which the IRS could not account
in 1993, according to an audit by the U.S. General Accounting
Office.51
$8,000,000,000 = The
amount the IRS spent to upgrade its computer
system unsuccessfully.52 Under a flat tax, this
money will be saved because the IRS no longer will need to track an
impossibly complex and unfair tax system.
$23,000,000,000 = The
total proposed price for the IRS's computerization and
modernization plans by 2008.53
Being
Compliant and Miserable on April 15
Sending huge amounts of tax money to
Washington, D.C., is never pleasant. Having to incur huge
compliance costs for the privilege of paying taxes, however, really
rubs salt in the tax wound.
New
Evidence
6,400,000 = The number of
taxpayers who visited IRS customer service centers
seeking answers to their tax questions in 1996.54
With a flat tax, few taxpayers will need help.
99,000,000 = The number
of taxpayers trying to comprehend the tax system who called
IRS hotlines in 1996.55 So long as a taxpayer
knows his income and the size of his family under a flat tax, he
will have nothing to worry about.
30 years = The number of
years a dispute can last between the IRS and a
corporation.56 Even one-year disputes
will be rare under a flat tax.
8,000,000 = The increase
in the number of taxpayers who will be subject to the
alternative minimum tax by 2007.57
This absurd provision forces taxpayers to calculate their income
two ways and then pay the government the higher of the two amounts.
It will disappear under a flat tax.
$134,347,500,000 = The
Clinton Administration's estimate of private-sector
compliance costs.58 If the
defenders of the status quo admit compliance costs are this high,
the actual costs may well be even higher.
653 = The number of
minutes the IRS estimates it takes to fill out a 1040
form.59 A flat tax postcard can
be filled out in five minutes.
72 = The number of
inches of height of the stack of tax forms in the Chrysler
Corporation's tax return.60
A postcard return is only a fraction of one inch in
height.
6,000,000 = The number of
unanswered phone calls made to the IRS in January
and February 1998.61 Considering that
answered calls frequently result in mistakes, taxpayers who fail to
get through probably should feel lucky.
2,400,000 = The number of
phone calls to the IRS that resulted in busy
signals in January and February 1998.62 A
busy signal is better than a wrong answer because the IRS holds
taxpayers liable for mistakes even if they are following IRS
advice.
56 = The percentage of
calls to the IRS in 1997 that went
unanswered.63 Again, no
answer is better than a wrong answer.
What
We Already Knew
$157,000,000,000 = The
amount spent by the private sector to comply with
income tax laws.64 Under a flat tax, these
costs will drop by more than 90 percent.
$7,240 = The average
compliance cost incurred by all but the biggest 10 percent
of corporations for every $1,000 of taxes paid in
1992.65 The radical
simplification brought about by a flat tax will be a boon for small
businesses that cannot maintain legal and accounting staffs to
comply with the tax code.
50 = The percentage of
taxpayers who feel compelled to obtain assistance
in filling out their taxes each year.66
5,400,000,000 = The
number of hours it takes Americans to comply with
federal tax forms.67 With only two
postcard-sized forms, compliance under a flat tax will require
minutes, not hours.
2,943,000 = The number of
full-time equivalent jobs spent on
compliance.68 In the flat
tax world, the cost of tax compliance will fall by more than 90
percent.
$3,055,680,000 = The
market value of the tax preparation firm H&R Block,
Inc., which opposes a flat tax.69
The company's opposition is understandable because a flat tax will
allow anyone to fill out a tax return without paying an expert.
Even
Experts Can't Figure Out the Forms
Jumping through all the tax hoops might
not be so painful if taxpayers at least could be confident that the
effort led to accuracy. The ultimate insult added to their injury,
however, is that even "expert" advice is no guarantee of receiving
correct answers to tax code questions.
New
Evidence
$24,000,000,000 = The
difference between what corporations said they owed and
what the IRS said they owed in 1992--a gap the government
admits is due to ambiguity and complexity in the code.70 A
flat tax will eliminate the confusion embedded in the current
system.
46 = The number of
wrong answers Money magazine received in 1998 when
it asked 46 different tax experts to estimate a hypothetical
family's 1997 tax liability.71 Professional assistance
will not be necessary with a simple, flat tax.
$34,672 = The difference
in liability between the highest and lowest incorrect
answers among the 46 professionals who failed to calculate
the tax liability of Money magazine's hypothetical
family.72 Such responses will be
all but impossible under a flat tax.
$610 = The amount the
hypothetical family would have overpaid on its 1997 taxes
if it had used the answer that came closest to the actual tax
liability (assuming, of course, that Money
magazine's expert had filled out the tax return correctly).73
Any mistakes, especially large ones, will be unlikely under a flat
tax.
45 = The number of
professional tax preparers who came up with different
answers when asked by Money magazine in 1997 to
fill out a hypothetical family's 1996 tax return.74
45 = The number of
professional tax preparers who came up with wrong
answers when asked by Money magazine in 1997 to
fill out a hypothetical family's 1996 tax return.75
76 = The percentage of
professional tax preparers who missed the right
answer by more than $1,000.76 This kind of result
will be impossible under a flat tax.
$58,116 = The
difference between the lowest estimate of the family's tax
bill and the highest estimate in Money's survey of
tax professionals.77 Because the
complexities in the tax code will disappear under a flat tax,
mistakes like this will, too.
$81 = The average
hourly fee charged by the professional preparers
who came up with the 45 wrong answers.78 Taxpayers will pay
nothing to calculate their own taxes on postcards under a flat
tax.
What
We Already Knew
50 = The number of
different answers that 50 tax experts gave
Money magazine in 1988 when asked to estimate a hypothetical
family's tax liability.79 Under a flat tax,
taxpayers will not need to consult tax preparers, much less run the
risk of paying penalties for wrong answers.
50 = The number of
different answers Money magazine received in 1989
when it asked 50 different tax experts to estimate a hypothetical
family's tax liability.80
48 = The number of
wrong answers Money magazine received in
1990 when it asked 50 different tax experts to estimate a
hypothetical family's tax liability.81
49 = The number of
different answers Money magazine received
in 1991 when it asked 50 different tax experts to estimate a
hypothetical family's tax liability.82
50 = The number of
wrong answers Money magazine received in
1992 when it asked 50 different tax experts to estimate a
hypothetical family's tax liability.83
41 = The number of
wrong answers Money magazine received in
1993 when it asked 50 different tax experts to estimate a
hypothetical family's tax liability (9 of the original volunteers
did not bother even to respond).84
The
Never-Ending Shell Game
The
needless complexity of the current tax code helps explain the
reasons that both the IRS and private tax experts frequently make
mistakes. Another reason that taxpayers have a problem complying
with the law is that politicians have made the tax code a moving
target.
New
Evidence
824 = The number of
changes in the tax code accompanying the 1997 tax
cut.85 A flat tax will put an
end to constant social engineering.
285 = The number of
new sections in the tax code created by the 1997
budget act.86 A flat tax will
eliminate most of the tax code.
3,132 = The number of
pages needed by the Research Institute of America to
explain the changes in the tax law in 1997.87
Flat tax postcards need just one page of instructions.
11,410 = The number of
tax code subsection changes between 1981 and
1997.88 A flat tax will
eliminate most of those subsections.
160 = The
percentage increase in the stock value of tax preparation
firms in the three-month period during and after enactment
of the 1997 budget.89
54 = The number of
lines on the new capital gains form, up
from 23 before the 1997 budget deal.90 Because double taxation
will end under a flat tax, the capital gains form will
disappear.
What
We Already Knew
878 = The number of
times major sections of the tax code were amended
between 1955 and 1994.91 A flat tax will
eliminate today's confusingly complex tax code and replace it with
a simple system that does away with constant tinkering and social
engineering.
100 = The increase in
the number of forms between 1984 and 1994.92 A
flat tax will eliminate all 100 forms.
9,455 = The number of
tax code subsections changed between 1981 and
1994.93 Under a flat tax,
politicians will not be able to use the tax code to micromanage
economic or social behavior.
578 = The percentage
increase in the number of tax code sections between 1954
and 1994 that deal with major segments of tax
law.94 Endless
changes in tax law will grind to a halt under a flat tax.
5,400 = The cumulative
number of changes in tax law since the 1986 Tax
Reform Act.95 Most, if not all, of
these changes add compliance costs to the economy--costs that a
flat tax will reduce substantially or eliminate.
$20,500,000,000 = The
amount of lost income the economy suffered in 1993
as a result of the economic uncertainty in the business community
caused by the constant manipulation of the tax code.96
To help prevent politicians from undermining business planning by
constantly changing the tax laws, a flat tax law should include a
supermajority provision blocking such tax rate increases.
The
Augean Stables
The
problem is not the IRS, but the politicians who created the
incomprehensible tax code and those who refuse to reform the
system. Politicians also are practically the only people in the
country who benefit from a complex and constantly changing tax
code.
New
Evidence
$400,000,000 = The amount
of the special tax break for one corporation
inserted in the tax code in 1986 at the urging of Dan Rostenkowski
(D-IL), then chairman of the House Ways and Means Committee.97 A
flat tax will wipe out provisions for special-interest groups.
What
We Already Knew
$413,072 = The average
amount of political action committee contributions
received by members of the House of Representatives tax-writing
committee during the 1994 election cycle.98 A
flat tax will reduce special-interest corruption and eliminate the
ability of politicians to use the tax code to reward friends and
punish enemies.
12,609 = The number of
special-interest organizations officially represented by
congressional lobbyists.99
A flat tax will wipe out all special preferences,
loopholes, deductions, credits, and tax shelters.
$3,200,000,000 = The
total amount earned by Washington, D.C., lobbyists
in 1993.100 By taking away the
playing field for special-interest tinkering, a flat tax will clean
up political pollution.
2 = The number of
IRS offices in Washington, D.C., made available to
Members of Congress and their staffs.101 With someone else
doing their taxes--free--it is little wonder that Members of
Congress do not understand the public support for a flat tax.
Why
Johnny Refuses to Pay
There comes a point at which taxpayers
simply give up. Some are driven into the underground economy by the
sheer complexity of the system. Others conclude that an unfair tax
code has no moral legitimacy and simply refuse to comply.
What
We Already Knew
$127,000,000,000 = The
amount of taxes not paid as a result of tax
evasion.102 A fair, simple, flat
tax will reduce tax evasion.
10,000,000 = The number
of people who unlawfully do not file tax
returns.103 By reducing
both the tax burden and compliance costs, a flat tax will bring
people out of the underground economy.
3,500,000 = The number of
people who do not file who would be eligible for
refunds.104 Perhaps more
than any other number, the millions of people who fail to file in
order to claim their tax refunds reveals just how intimidating the
tax code has become.
4 = The number of
times a single dollar of income can be taxed under
the current system, counting the capital gains tax, corporate
income tax, personal income tax, and death (estate) tax.105
By eliminating double taxation, a flat tax will make sure the
government treats all income equally and will end one of the
biggest causes of tax evasion and complexity in the current tax
code.
100,000 = The number of
Internet sites found by one search engine when queried for
the phrase "tax shelter."106 Because a
flat tax will eliminate all discrimination in the tax code and
allow people to keep a greater share of their income, tax shelters
will almost vanish after reform.
Enough Is
Enough
The
damage caused by the current tax code, both to the economy and to
the body politic, is reaching crisis proportions. Insulated from
the effects of their own handiwork, however, politicians are very
likely to be the last ones to understand just how indefensible the
system has become. Perhaps these real examples of IRS abuse will
help them to understand the problem:
New
Evidence
$3,500 = The amount
one woman was forced to pay twice, even
though the IRS eventually admitted the debt had been owed--and
paid--by her former husband.107
$210,260 = The amount
the IRS tried to garnish from the wages of a woman for the
back taxes her husband had owed before their
marriage.108
$26 = The amount
the IRS seized from a 6-year-old's bank account
because her parents owed money.109
$70,000 = The amount
demanded by an IRS agent who was threatening to send a
couple to jail in a case that the tax court subsequently
dismissed because the IRS's claim "was not reasonable in fact or in
law."110
$500,000 = The amount
the IRS was forced to pay a taxpayer after
engaging in a vendetta against him, including putting the innocent
man in jail for four months.111
$6,484,339 = The amount
demanded by the IRS from the family of a victim of Pan Am
flight 103, based on the assumption of a future
settlement.112
$900,000 = The amount
a small businessman was fined after being
entrapped by his accountant, a paid informer for the IRS.113
$5,300,000 = The amount
the IRS paid its informants in 1993.114
25 = The percentage of
households with incomes over $50,000 that would pay an
inaccurate assessment from the IRS rather than
fight.115
What
We Already Knew
$46,806 = The amount of
tax penalty imposed on one taxpayer in 1993 for an
alleged underpayment of 10 cents.116
1,300 = The number of
IRS employees investigated and/or disciplined for
improperly viewing the tax returns of friends, neighbors, and
others.117
$155 = The amount of
penalty imposed on a taxpayer in 1995 for an
alleged underpayment of 1 cent.118
50 = The percentage of
top IRS managers who admitted they would use their
position to intimidate personal enemies.119
$14,000 = The amount
allegedly owed by a daycare center that was raided
by armed agents, who then refused to release the children until
parents pledged to give the government money.120
80 = The number of
IRS agents referred for criminal investigation on
charges of taking kickbacks for fraudulent refund checks.121
$3,000,000,000 = The
dollar assets of Princeton/Newport, an investment company
that was forced into liquidation after 40 armed federal
agents raided the company on suspicion of tax evasion--only to have
the IRS later conclude that Princeton/Newport actually had overpaid
its taxes.122
$10,000 = The
fine imposed on one taxpayer for using a 12-pitch
typewriter to fill out his tax forms instead of a 10-pitch
typewriter.123
109 = The number of
envelopes containing unprocessed information found
in the trash at the IRS's Philadelphia Service Center.124
GRAND
TOTAL: More than 737 billion incredible-but-true reasons to
simplify the tax code with a flat tax.
WHAT THESE
NUMBERS REALLY MEAN
These horror stories and statistics are
not necessarily evidence that individual IRS agents are bad people,
or that tax administrators want to violate people's rights.
Although examples of unwarranted behavior are included in this
discussion, the key problem they illustrate is that current tax law
is so arbitrary and incomprehensible that even government agents in
charge of enforcing the law cannot make sense of it.
The
only way to address these problems is through fundamental reform. A
flat tax will reduce the power of the IRS dramatically by
eliminating the vast majority of possible conflicts. In a system in
which the only information individuals are obligated to provide is
their total income and the size of their families, much of the
uncertainty and fear regarding paying taxes will disappear.
Most
individuals never have to experience the greater complexities of
paying corporate income taxes; still, they can appreciate the fact
that a flat tax will generate dramatic savings for business. Under
a flat tax, the money that businesses now spend to comply with the
tax code will become available instead for higher wages and
increased investment, thereby helping the United States to become
more competitive.
Although the key principle of a flat tax
is equality, it turns out that a system based on taxing all income
just one time at one low rate also promotes simplicity. To
understand the reasons that introducing a flat tax would lead to
such a dramatic reduction in both tax code complexity and
compliance costs, consider the following numbers:
0 = The number of
taxpayers under a flat tax who will have to calculate
depreciation schedules.
0 = The number of
taxpayers under a flat tax who will have to keep track of
itemized deductions.
0 = The number of
taxpayers under a flat tax who will need to reveal their
assets to the government.
0 = The number of
taxpayers under a flat tax who will lose their farms or
businesses because of the death (estate) tax.
0 = The number of
taxpayers under a flat tax who will have to pay a double
tax on their capital gains.
0 = The number of
taxpayers under a flat tax who will have to compute a
phase-out of their personal exemption because their incomes are too
high.
0 = The number of
taxpayers under a flat tax who will be subject to the
alternative minimum tax--those forced to calculate their tax bill
two different ways and then to pay the government the greater of
the two amounts.
0 = The number of
taxpayers under a flat tax who will have to pay taxes on
overseas income that already was taxed by the government of the
country in which the income was earned.
0 = The number of
taxpayers under a flat tax who will have to pay taxes on
dividend income that already was taxed at the business
level.
0 = The number of
taxpayers under a flat tax who will be taxed on interest
income that already was taxed at the financial institution
level.
CONCLUSION
Those who urge policymakers to "fix" the
IRS should realize that condemning the agency itself will not solve
the intractable problems of the current tax code. Furthermore,
enacting a "taxpayer bill of rights" will accomplish little if
provisions of the tax code that constitute the underlying problem
are left in place. At least two versions of a "taxpayer bill of
rights" previously enacted into law have had little effect.
Americans rapidly are approaching the
level of anger toward unfair, capricious, and oppressive taxation
that gave rise to the American Revolution in 1776. This anger is
directed at an immense and impersonal government agency that often
operates outside the standards it imposes on taxpayers. Americans
should be angry, but not at the IRS: They should direct their anger
toward the Members of Congress responsible for enacting the laws
that created today's tax code.
The
only effective way to enhance com
"National Voter Survey," The Polling
Company, Washington, D.C., March 17-24, 1997.
People Magazine Annual Readers' Poll,
People, January 8, 1990.
Shirley Peterson, "Death to the Tax Code,"
The New York Times, July 29, 1995.
"Tax Report; A Special Summary and
Forecast of Federal and State Tax Developments," The Wall Street
Journal, March 26, 1997, p. A1.
Stephen Barr, "At Hub for Tax Questions,
An Effort to Give Meaning to 'Service' in IRS," The Washington
Post, March 18, 1998.
Jeffrey H. Birnbaum, "UNBELIEVABLE! The
Mess at the IRS Is Worse Than You Think," Fortune, April 13,
1998.
Ibid.
"IRS Releases Report on Activities of Art
Advisory Panel During 1997," Daily Tax Report, March 11,
1998.
Rob Wells, "Senate Hearings on IRS to
Begin," Associated Press wire story, September 23, 1997.
Arthur P. Hall, "Growth of Federal
Government Tax `Industry' Parallels Growth of Federal Tax Code,"
Tax Foundation Special Report No. 39, September 1994.
Ibid.
Daniel J. Pilla, "Why You Can't Trust the
IRS," Cato Institute Policy Analysis No. 222, April 15,
1995.
Arthur P. Hall, "Compliance Costs of
Alternative Tax Systems," Tax Foundation Special Brief, June
1995.
Birnbaum, "UNBELIEVABLE! The Mess at the
IRS Is Worse Than You Think."
"Taxpayer Compliance: Analyzing the Nature
of the Income Tax Gap," Statement of Lynda D. Willis, U.S. General
Accounting Office, before the National Commission on Restructuring
the Internal Revenue Service, January 9, 1997.
U.S. General Accounting Office, by
facsimile to author, March 31, 1998.
U.S. General Accounting Office, Tax Gap
Symposium, GGD-95-157, June 2, 1995.
See http://www.irs.ustreas.gov/forms_pubs/forms.html.
Peterson, "Death to the Tax Code."
Ibid.
Elizabeth McDonald, "Breakdown at the
IRS," Worth, March 1995.
Robert E. Hall and Alvin Rabushka, The
Flat Tax (Stanford, CA: Hoover Institution Press, 1995).
Ibid.
U.S. Department of the Treasury, Internal
Revenue Service Data Book, October 1, 1995 to September 30,
1996.
Birnbaum, "UNBELIEVABLE! The Mess at the
IRS Is Worse Than You Think."
Ibid.
U.S. General Accounting Office, IRS'
Use of Random Selection in Choosing Tax Returns for Audit,
GGD-98-40, February 5, 1998.
Associated Press, "IRS Targets Poor in
South in Random Audits Program," The Washington Times, March
1, 1998.
Ibid.
Pilla, "Why You Can't Trust the IRS."
James L. Payne, "Unhappy Returns: The $600
Billion Tax Ripoff," Policy Review, Winter 1992.
James Bovard, Lost Rights: The
Destruction of American Liberty (New York, NY: St. Martin's
Press, 1994).
"33 Million Penalty Notices," The Wall
Street Journal, April 17, 1995.
Birnbaum, "UNBELIEVABLE! The Mess at the
IRS Is Worse Than You Think."
Ibid.
Testimony by Senator Robert Kerrey (D-NE)
before the House Ways and Means Committee, September 16, 1997.
Timothy W. Maier and Sean Paige, "A New
Tax Revolt," Insight, November 3, 1997.
Frank Lalli, managing editor of
Money magazine, Testimony before National Commission on
Restructuring the Internal Revenue Service, April 17, 1997.
Ibid.
John Berlau, "IRS Countdown to Meltdown,"
Insight, November 3, 1997.
James Bovard, "The IRS vs. You," The
American Spectator, November 1995.
U.S. General Accounting Office, Tax Gap
Symposium.
Pilla, "Why You Can't Trust the IRS."
Carl Horowitz, "The Hidden Cost of Higher
Taxes," Investor's Business Daily, September 16, 1993.
Pilla, "Why You Can't Trust the IRS."
Ibid.
Ibid.
McDonald, "Breakdown at the IRS."
Ibid.
Ibid.
Pilla, "Why You Can't Trust the IRS."
Andrew Serwer, "The Taxman Cometh--Head
for the Hills!" Fortune, March 3, 1997.
Shelley L. Davis, Unbridled Power:
Inside the Secret Culture of the IRS (New York, NY: Harper
Business, 1997).
U.S. General Accounting Office, IRS
Faces Challenges in Measuring Customer Service, GGD-98-59,
February 23, 1998.
Ibid.
U.S. General Accounting Office, Tax Gap
Symposium.
H&R Block, "Tax Simplification
Proposals: 1998," accompanying letter from Robert Weinberger, vice
president, government relations, to Jonathan Talisman, deputy
assistant secretary of tax policy, U.S. Department of the Treasury,
February 9, 1998.
Budget of the United States Government,
FY1999, Appendix (Washington, DC: U.S. Government Printing
Office, 1998), p. 793.
Privacy Act and Paperwork Reduction Act
Notice, Internal Revenue Service, 1998 1040 form instructions.
John Steele Gordon, "Abolish the Corporate
Income Tax," The Wall Street Journal, March 11, 1998.
Barr, "At Hub for Tax Questions."
Ibid.
Ibid.
Arthur P. Hall, "Compliance Costs of
Alternative Tax Systems, II," Tax Foundation Special Brief,
March 1996.
Ibid.
Pilla, "Why You Can't Trust the IRS."
Arthur D. Little, "Development of
Methodology for Estimating the Taxpayer Paperwork Burden," Final
Report to the Department of Treasury, Internal Revenue Service,
June 1988.
Payne, "Unhappy Returns: The $600 Billion
Tax Ripoff."
Based on stock price as of 2:40 p.m. on
February 28, 1997.
U.S. General Accounting Office, Tax Gap
Symposium.
Joan Caplin, "6 Mistakes Even the Tax Pros
Make," Money, March, 1998.
Ibid.
Ibid.
Teresa Tritch, "Why Your Tax Return Could
Cost You a Bundle," Money, March 1997.
Ibid.
Ibid.
Ibid.
Ibid.
Greg Anrig, Jr., "Even Seasoned Pros Are
Confused This Year," Money, March 1988.
Ibid.
Denise M. Topolnicki, "The Pros Flub Our
Third Annual Tax-Return Test," Money, March 1990.
Teresa Tritch and Deborah Lohse, "The Pros
Flub Our Tax Test (Again)," Money, March 1991.
Teresa Tritch and Deborah Lohse, "Tax
Payers, Start Worrying," Money, March 1992.
Teresa Tritch, "Keep an Eye on Your Tax
Pro," Money, March 1993.
Janet Novack and Laura Saunders, "Torture
by Taxation," Forbes, August 25, 1997.
Ben Wildavsky, "A Hike in Complexity,"
National Journal, August 23, 1997.
Tom Herman, "Tax Report," The Wall
Street Journal, August 27, 1997.
Harold Apolinsky, "Need for Ten Year
Moratorium," Small Business Council of America, August 14,
1997.
Brian Wesbury, "Do Taxes Matter?" Griffin,
Kubik, Stephens, & Thompson, Inc., October 9, 1997.
Albert B. Crenshaw, "True to Form, Tax
Time Gets Harder," The Washington Post, March 7, 1998.
Arthur P. Hall, "The Cost of Unstable Tax
Laws," Tax Foundation Special Report No. 41, October
1994.
"33 Million Penalty Notices," The Wall
Street Journal, April 17, 1995.
Apolinsky, "Need for Ten Year
Moratorium."
Hall, "Compliance Costs of Alternative Tax
Systems."
Representative Richard K. Armey, "How
Taxes Corrupt," The Wall Street Journal, June 19, 1996.
Hall, "The Cost of Unstable Tax Laws."
"Packwood Shows System's Ills...,"
Gazette-Times (Corvallis, Oregon), February 26, 1998.
Press release, "1994 PAC Activity Shows
Little Growth over 1992 Level, Final FEC Report Finds," Federal
Election Commission, 1995.
Information from Office of the Clerk, U.S.
House of Representatives.
Armey, "How Taxes Corrupt."
Pilla, "Why You Can't Trust the IRS."
McDonald, "Breakdown at the IRS."
Ibid.
Peterson, "Death to the Tax Code."
Daniel J. Mitchell, "Taxes, Deficits, and
Economic Growth," Heritage Foundation Lecture No. 565, June
17, 1996.
See
http://www.altavista.com/cgi-bin/query?pg=q&what=what=web&fmt=.&q=tax+shelter.
Shawn Rychling, "Driving a Stake into the
IRS," Citizens Against Government Waste Waste Watch, Fall
1997.
Ann Reilly Dowd, "Money Audits the IRS,"
Money, January 1997.
Ibid.
Bovard, "The IRS vs. You."
Ibid.
Ibid.
Ibid.
Ibid.
Dowd, "Money Audits the IRS."
Bovard, Lost Rights.
Stephen Barr, "1,300 IRS Workers Accused
of Snooping at Tax Returns: Employees Used Computers to Peek at
Friends' Files," The Washington Post, July 19, 1994.
Taxpayer letter to The Heritage
Foundation, February 7, 1996, accompanied by copy of IRS form
941.
Serwer, "The Taxman Cometh."
"IRS Invaded Day Care Center: Parents
Claim Children 'Held Hostage,'" Dollars & Sense, April
1985.
"Breach of Trust at the IRS," St.
Petersburg Times, August 8, 1993.
Bovard, Lost Rights.
Ibid.
Davis, Unbridled Power.