October 30, 2002

October 30, 2002 | Commentary on Taxes

ED103002b:  Shelter from the Storm

It's come to this: The federal government has accumulated such a huge backlog of uncollected tax debts that the IRS is thinking about hiring private bill collectors to help track down the missing funds.

They're also offering deals to taxpayers who use certain tax shelters-methods marketed by accounting firms for years, The Wall Street Journal reports-that government officials say are improper. Many of these shelters involve highly complex transactions that often leave even IRS officials and tax lawyers scratching their heads.

IRS officials say they're particularly incensed by the growing gap between what corporations tell shareholders they've earned and what they tell the government they've earned. Two years ago, for example, IBM reported a pretax profit of $5.7 billion to its shareholders. At the same time, it was telling the government it made only $546 million.

Now, most people will react to these stories in one of two ways. They'll denounce the IRS as a bunch of busybodies who ought leave hard-working Americans alone, or they'll smile at the thought that certain greedy companies are getting what they deserve.

But my main reaction is this: Have you ever heard a better case for simplifying our ridiculously over-complicated tax system? If the fact that the IRS may soon hire outsiders to find missing tax money doesn't convince our lawmakers that something's seriously wrong here, nothing will. As we said on the Kemp Commission on Tax Reform back in 1995, "the present system is beyond repair."

It's easy for politicians to beat up on corporations and individuals who appear to be dodging taxes, and no one can deny there are genuine cheats who deserve to be caught and punished. But when you consider what a complicated mess the U.S. Tax Code has become, you can see we're not exactly encouraging good behavior here.

The income-tax system began in 1913 as a two-page form backed by 14 pages of law. Today, we struggle with 742 different forms and 254 separate publications, backed by more than 17,000 pages of law. Clocking in at close to six million words, the tax code is more than seven times longer than the Bible.

This complexity isn't just a nuisance; it's costly. According to IRS Commissioner Charles Rossotti, Americans spend $80 billion per year complying with federal tax laws alone. A University of Michigan study puts the cost of enforcing and complying with federal personal and corporate income taxes at around $115 billion per year.

This complexity, Rossotti admits, encourages cheating and provides "a worthy challenge" to "pursue simplification to the maximum extent possible."

So let's think big and encourage Congress to consider something that would certainly simplify things "to the maximum extent possible"-a flat tax. That's right, one tax rate for everyone. A single form would do it: Put what you made. List how much was withheld from your paychecks. Figure out what's left to pay, and send it in.

And if this sounds like some untried, pie-in-the-sky notion, think about this: Russia already has one. Two years ago, the former communist state had a Western-style "progressive" income tax. But high tax rates drove capital out of the country and encouraged workers to accept income under the table. So Russia decided to junk its tax code and replace it with a 13 percent flat tax. Since then, inflation-adjusted tax revenues have jumped by nearly 30 percent.

One thing's clear: We can't continue on the path we've been on for decades, with politicians mangling the tax code so badly that no one knows for sure how much to pay. It's time to put this madness to rest.

Edwin J. Feulner, Ph.D., is president of The Heritage Foundation (www.heritage.org), a Washington-based public policy research institute.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

Related Issues: Taxes