Tax Policy

Privacy A Benefit Of Flat Tax

Those who would replace today's incredibly complex federal tax system with a flat tax have pointed out many of its economic benefits and its virtue of simplicity. But little has been said about its potential to increase taxpayers' privacy.

Under the present system, details about an individual's savings, investments and assets are laid bare to the eyes of tens of thousands of Internal Revenue Service (IRS) employees -- and abuses are well documented. But that information would not be divulged under a flat tax.

  • All the information about when a person bought an asset, how much he paid for it, when it was sold and how much it was sold for must now be reported to the IRS -- but not under a flat tax system, since capital gains would be lumped into total income.

  • Again, confidentiality would be boosted by getting rid of the estate tax -- since the IRS would not need to rifle through every piece of property the deceased owned.

  • Since the double tax on dividends would be eliminated, the reporting of profits would take place at the corporate level and individuals would not have to divulge their holdings.

  • Combining the flat tax with the benefits of Roth IRAs -- under which withdrawals can be made without paying a second layer of taxes -- taxpayers would not have to let the government know how much they had in savings and where the money was held.

Source: Daniel Mitchell (Heritage Foundation), "Privacy Argument for the Flat Tax," Washington Times, April 28, 1998.

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