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
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
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
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
This complexity, Rossotti admits, encourages cheating and provides
"a worthy challenge" to "pursue simplification to the maximum
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
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
J. Feulner, Ph.D., is president of The Heritage
Foundation (www.heritage.org), a
Washington-based public policy research institute.