Abolishing the Current Tax Code

Posted March 1, 2007

The United States Tax Code is one of the largest collections of procedural and legal documents under one name.  It contains almost 380 times as many words as the U.S. Constitution (about 1.7 million words on 17,000 pages).  The code and its enforcer, the Internal Revenue Service (IRS), is perhaps the most frightening and mysterious government entity to American tax payers.  There is no doubt that the shear amount of text in the Tax Code is daunting, even to professionals, and the idea that an average person could comply with such a twisted vault of rules is shocking.  There are now over 115,000 IRS employees tasked with interpretation and enforcement of this monstrosity which is more employees than the Environmental Protection Agency, the Occupational Safety and Health Administration, the Federal Bureau of Investigation, the Drug Enforcement Agency, the Food and Drug Administration, and the Bureau of Alcohol Tobacco and Firearms -- combined. (Moore, 1998)  Americans devote a total of 7.4 billion hours each year to comply with the Tax Code. (Goodlatte, 2007)  I feel that the current Tax Code is badly broken, should be abolished and replaced with a system that actually makes sense – linguistically, syntactically and, of course, financially to the government and the people.

There are several ways a complete re-write of the U.S. Tax Code could be done.  All would, in whole or in part, abolish the IRS, close loopholes and bring fairness to taxation, bring transparency and accountability to the tax process and ensure Social Security, Medicare and retirees are taken care of. (FairTax.org)  Among the alternatives being considered as a replace for the current Tax Code are The Fair Tax, The Flat Tax and a National Sales Tax.

Endorsed by Steve Forbes, well known and respected in the financial world, the Flat Tax would replace current tax law with a simple flat tax of 17% applying to everyone.  With a simple plan such as that, he says that this would virtually eliminate the IRS, its paperwork and bureaucratic red tape and the nightmare of dealing with it.  Forbes discusses how other countries are using a flat tax system to great benefit and how it stops businesses from abusing the system in shady accounting practices and how special interest groups would no longer be able to take advantage of tax breaks. (Forbes, 2005)  The Flat Tax would be better than our current system, but I think we can do better.

Another option is FairTax, not a reform, but a replacement for the current Tax Code.  It would replace all federal income taxes including personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment and corporate taxes.  Instead of all those separate and cumulative taxes, the FairTax would levy a single revenue neutral tax of 23% of every dollar spent on the retail purchase of new goods and services.  Here’s where it gets complicated, though.  On certain essential goods and services (as measured by the poverty level expenditures estimated by the Department of Health and Human Services), a rebate check would be sent to each taxpayer based on their calculated usage of these goods and services.  This measure would be used to ensure that those at or below poverty level would not, in effect, pay taxes.  Retirees on Social Security should enjoy this alternative, as in addition to the Social Security benefit they are already receiving, they would also receive the monthly “prebate” check.  The U.S. economy should also grow under this tax based on research.  The higher take-home wages would result in more money spent in the market which would, in turn, provide for more incentive to work, increasing employment rates. (FairTax.org)

Finally, and my personal preference, is moving to a simple national sales tax to replace the income tax.  It would eliminate all income taxes and replace it with an additional sales tax collected by retailers, in addition to the state and local sales taxes they are already collecting.  There would no longer be any forms for taxpayers to fill out and, therefore, a huge portion of the IRS could be eliminated, other than those that would be required to make sure that businesses reported and paid in the proper share of the collected sales tax.  It would encourage savings and investment as there is no tax on money not spent on retail goods and services.  One of the most important aspects, however, is that under this system no one is exempt.  If you purchase something, you are paying taxes.  This would include all visitors to our country, legal or otherwise, and bring any underground revenues to taxation simply by being spent.  It would eliminate every kind of tax evasion, fraud and trickery.  The only way not to pay taxes would not to consume. (Metcalf, 1997)

The issue is simple; we need a do-over.  The U.S. Tax Code is a huge, complicated beast that has lived long past its prime.  While any reform would be welcome, a complete rewrite is needed and the simpler, the better.  It’s not getting any shorter.