Case #5

Abolish the IRS by David Beers   David Beers is a Houston-based computer programmer. He has coached debate at St. John's School in Houston and Wichita Collegiate School in Kansas. He holds a Master's degree in economics from George Mason University.

There can be little question about the greatest invasion of the privacy of employment records and consumer information in this country: it is performed by the Internal Revenue Service in its enforcement of the personal income tax. This invasion is systematically and annually imposed on every working American. It involves the compulsory relinquishment of not just a few pieces of personal information, but of an accounting of every significant transaction or asset from which an individual has earned income, as well as many important consumer transactions. This detailed profile of his or her economic life is demanded under threat of crushing financial penalty or incarceration for non-compliance. In no area of an average citizen’s life is so much personal information so routinely confiscated with so little legal recourse. The intrusions on privacy perpetrated in the event of an IRS audit are even more profound. Auditors typically demand access to banking records, business records, receipts and other records of how ones income has been spent in order to identify improper deductions or evidence of unreported income. Given the complexity of the tax code (the IRS itself answers only 73% of the phone queries it receives correctly!)18 it is easy for an honest and diligent taxpayer to run afoul of the law, suffering humiliating intrusions in his personal affairs, enormous legal expenses, and loss of reputation. Even when an audit uncovers no signs of wrong-doing, it can stigmatize the taxpayer and impose enormous costs in time and money for which he need not be compensated by the government. Moreover, stories of how audits or the information they produce have been used illegally by IRS employees and corrupt political officials to punish or threaten personal enemies are common enough that political dissidents and even average citizens have reason to feel threatened. If the government decides that you are not paying the taxes you should and you disagree, you are notoriously without recourse. Refuse to pay and the IRS may seize virtually any property you own--or even have a partial interest in--often without a warrant, court order, or any other form of judicial due process. Even in cases where seizure requires a Writ of Entry from a judge, the hearing is ex parte, meaning that you are not entitled to representation.19 The judge decides whether the seizure is valid based only on the information provided by the IRS. The 4th Amendment rights that protect citizens from unreasonable search and seizure by law enforcement officials do not apply to I.R.S. agents since the laws they are enforcing are considered "administrative" rather than criminal.20 During the last decade the IRS has typically performed 10,000 to 11,000 such seizures per year.21 Although highly publicized horror stories have forced Congress to crack down on abuses of power by the IRS, the General Accounting Office (and the IRS itself) do not expect that the recent decline in the most egregious behavior by tax collectors will last long.22 There is good reason for this. It simply is impossible to levy and enforce a tax on the income people earn without engaging in profound intrusions on their financial and ultimately personal privacy. Compliance with the law must be verified. Since some people will attempt to evade the law and income-earning transactions are relatively easy to hide, verification must be thorough and intense. Thus, trampled privacy is inherent in the nature of any tax on income. From the standpoint of preserving individual dignity, privacy, and autonomy alone there is good reason to consider not reforming the IRS, but eliminating it altogether. Abolish the IRS? Sounds wonderful if like the average working American you’re handing over more than a third of what you earn to one tax collector or another, the IRS being only the largest and most demanding. But how will the government collect taxes to pay for all those vital services it provides? A debater considering an income tax affirmative has at least three possible ways it could go about answering this question and three plans that emerge from them. One answer is to continue to collect income taxes but in a less intrusive manner. Replace our current byzantine tax code, which fills over 100,000 pages in the Federal Register, with a flat tax on income. A flat tax charges everyone the same tax rate and does not allow deductions or tax regulations that are designed to reward or punish various kinds of behavior as the current income tax does. Complying with such a tax is a simple matter. The massive Form 1040A that citizens dread having to fill out each Spring would be replaced by a simple form the size of a postcard. Verifying compliance would also be much easier, since the only information the government would need to know is how much you earned. While this is still an intrusive question, it does not require a multi-billion dollar agency that empowers agents to maintain detailed files on law-abiding citizens and probe their every financial dealing. The IRS could be virtually eliminated. A good place to begin research on a flat tax affirmative is an excellent website maintained by Ph.D. economist and congressman Dick Armey.23 Rep. Armey is one of the most articulate proponents of the flat tax and his office maintains a good collection of both political and scholarly resources documenting its advantages over the current system. Some of the key advantages, in addition to greater repect for privacy, are economic. Merely attempting to comply with the tax code--hiring accountants, tax consultants, and often lawyers to interpret the law--costs Americans more than $100 billion each year, according to the Tax Foundation.24 They estimate that 94 percent of this cost would be eliminated by a flat tax. The flat tax also would increase prosperity. The complexities in the existing tax code are designed to direct economic activity into areas that politicians want to encourage, not necessarily those that are the most productive or valuable from the standpoint of the average citizen. In a free market, resources tend to move into activities that produce the greatest satisfaction for consumers and the best return for investors, but the current tax code greatly hampers this process by distorting the natural economic incentives. For example, when considering whether investments in one’s education or a capital asset will pay off with higher future income, the individual must consider that the higher income is accompanied by a higher tax bracket--in many cases a heavy enough burden to discourage an otherwise intelligent investment. The flat tax ends these distortions increasing economic productivity and wages without producing inflation. The resulting economic growth makes possible significant reductions in the tax rates that people have to pay to finance projected government spending. Despite its advantages, many economists and economic historians do not think the flat tax is the best way to eliminate the IRS. Our current system started out as a flat tax on income when the 16th Amendment to the Constitution was passed in 1913. Within three decades it had grown to a complex, "progressive" system with top rates reaching over 90 percent. Attempts to flatten and simplify the system in the mid-1980s were even more short-lived. Politically, the temptation to regulate behavior and redistribute resources through income tax deductions and regulations seems to be irresistible. The fundamental problem also remains that taxing income inherently involves significant intrusions in privacy, even if with lesser intensity under the flat tax. For these and other reasons, some tax reformers have called for an end not simply to the IRS, but to the concept of taxing income altogether. To the question "how will we fund the federal government" they answer: levy a national retail sales tax. Many states already use sales taxes in favor of income taxes and have discovered significant advantages. Sales taxes do not require that any personal information be collected on taxpayers, eliminating the privacy problem for the average citizen. Since people are taxed when they spend their money, not when they earn it, saving is encouraged. This has strong economic benefits since higher savings rates increase the availability of investment capital (lower interest rates) making homes and new business ventures more affordable and boosting productivity. Additionally, a national retail sales tax is argued to be far less vulnerable to corruption by special interest groups. Since there is no easy way to create new deductions or multiple tax rates for different classes of individuals, the sales tax is less likely to degenerate back into the same complex system we have today. In fact, since taxpayers would see the full amount they pay in taxes each time they purchase a good, proponents argue that the sales tax would strengthen the constituency for lower taxes and greater economic freedom. A good start for research on the National Retail Sales Tax is a website maintained by the staff of Rep. Billy Tauzin, who co-authored a major sales tax bill with Rep. Dan Schaeffer in 1997. The bill would repeal both the personal and corporate income taxes in favor of a single retail sales tax. But the national retail sales tax has its detractors as well. Dick Armey argue that "If the government sets out to collect a new tax at the cash register, it will soon have no choice but to extend that tax beyond the retailer to every level of production, as it desperately tries to stop inevitable and massive tax evasion. Any sales tax will become a complex, pervasive, multi-rate value-added tax. We will soon be living under a VAT, possibly the most insidious tax scheme ever devised."25 A third answer to the question "how will Uncle Sam pay all his bills without the IRS" is the most radical, but perhaps the most faithful to the principle of limited government our nation was founded on. The answer is that what he spends that couldn’t be financed without the income tax probably shouldn’t be spent in the first place. Repeal the 16th Amendment which established the income tax in 1913, allow each household to make its own decisions about how to spend its earnings, and reduce federal spending accordingly. Such a proposal is admittedly a non-starter politically. Both Democrats and Republicans on Capitol Hill are firmly attached to their nearly $2 trillion budget (roughly one-seventh of what the nation produces in a year) and show few signs that they would be willing to reduce it. Repealing all taxes on income--individual, corporate, and payroll taxes--would leave only about $162 billion.26 How could anyone seriously suggest that the country would survive on such a "tiny" federal budget? First, a bit of historical perspective is in order. $162 billion is a bigger budget than the federal government has spent for two-thirds of its fiscal years since the Constitution was ratified, even after adjusting the figures for inflation. Even in 1941, when the New Deal was in full swing, the nation was preparing for war, and the government assuming costly roles its founders never envisioned, it spent in 1987 dollars only about $135 billion.27 Secondly, most of the functions that the federal government spends money on fall into two categories anyway: things that people could better do for themselves if they had the freedom to spend their earnings as they pleased, or things that the government ought not to be doing because they are unjust or foolish. In the first category fall programs like Social Security, Medicare/Medicare, and federal education spending. With the tax revenue collected to finance Social Security (most of which the government spends on things other than Social Security!) retirees and the disabled could purchase annuities that would provide for them far better financially than the Social Security program. Anyone who has paid into the program already could be "bought out" and left free to invest their earnings in private pensions or other secure investments. Health care for the poor and elderly used to be efficiently provided by charitable organizations, personal savings, mutual aid societies, and fraternal orders (which operated much like modern day HMOs until they were effectively legislated out of existence earlier this century). As for education, there is very little evidence that spending by the federal government has done anything to improve education and good evidence of substantial harm.28 If the Department of Education were abolished and its budget returned to the people, the savings would be enough to pay private school tuition for millions of students that are stuck in failing schools. In the category of "unjust or foolish things the government spends our tax money on" should be included the hundreds of billions of dollars of corporate welfare paid to private businesses, and the billions in aid paid to foreign governments. These entities have no just claim on an individual’s hard-earned money and to force people to support them is morally wrong. National defense is a legitimate function for government, but the bulk of the federal defense budget is spent on failed policing missions and entangling alliances that only serve to make the world a more dangerous place. What lasting peace or justice have our "peacekeeping" missions in Somalia, Bosnia, or Kosovo brought about? How have our military aid and alliances with the Shah of Iran, Sadaam Hussein (!), and Israel aided the cause of peace and security in the Middle East? If some Americans would like to continue supporting these or other costly causes, surely no one should keep them from taking up a voluntary collection. Repealing the income tax would give people the freedom to choose the causes they support rather than have politicians decide, sending taxpayers the bill when they are finished. The government we would have in the absence of the income tax would be far closer to the one drafted in the U.S. Constitution than the one we have today. The Constitution was careful to enumerate each of the powers the federal government was to have and to reserve all other powers to the States and the people. The power to tax was specifically reserved to finance spending in the "common defense" and for the "general welfare." The founders were well aware that the power of government could be corrupted to offer "special defense" or to serve the "particular welfare" of one group in society at the expense of others. They knew that once government took on the role of "robbing Peter to pay Paul," politics would degenerate into a game of fighting over pieces of a disappearing pie. Unfortunately the Constitution has lost its force to restrain the power of government. Repealing the income tax would be a major step toward a more prosperous, peaceful, and just society. Questions and comments welcome: Send to grehmke@fee.org