The Heritage Foundation

Backgrounder #1170 on Taxes

April 15, 1998

April 15, 1998 | Backgrounder on Taxes

737,734,941,858 Reasons...and Still Counting: Why a Flat Tax IsNeeded To Reform The IRS

Last year, The Heritage Foundation released a publication, "577,951,692,634 Reasons...And Counting: Why a Flat Tax Is Needed to Reform the IRS." Since that time, calls to reform the Internal Revenue Service have led to unprecedented hearings in Congress and outcry among the public. In 1997, however, Congress moved away from reform and approved a tax bill that adds even more complexity to the tax code. Because of that bill, as well as Heritage's continued research into the myriad nooks and crannies of the current tax code, 159,783,249,224 new reasons that the Internal Revenue Code should be replaced with a flat tax have come to light, bringing the total number of reasons to 737,734,941,858.

The Internal Revenue Service (IRS) frequently is cited as the most hated of all government agencies. This aversion goes well beyond a simple dislike of paying taxes. Many Americans feel the IRS uses its vast powers capriciously to enforce a tax code that is unfair and incomprehensible. Indeed, a 1997 national voter survey finds that the majority of respondents would prefer to undergo a root canal than be audited by the IRS.1 And a 1990 magazine survey finds that the most frightening words people could imagine hearing when they answer the phone are "This is the IRS calling."2 Although Americans have every right to be upset by an oppressive tax system, their anger should not be directed at the IRS. The vast majority of problems with the current tax system are the inevitable result of bad tax policy.

The way to reduce the intense popular aversion to the IRS is to enact a flat tax. By wiping out all the complicated, obscure, and convoluted provisions of the current tax code, a flat tax will reduce compliance costs and ease the uncertainty and anguish that make April 15 everyone's least favorite day of the year. In the words of former IRS Commissioner Shirley Peterson, who directed the agency in 1992, "We have reached the point where further patchwork will only compound the problem. It is time to repeal the Internal Revenue Code and start over."3 As reported in The Wall Street Journal last year,

A recent survey of 275 IRS workers around the nation, done by a national IRS restructuring commission headed by Senator Kerrey of Nebraska and Representative Portman of Ohio, found overwhelming support within the IRS for simplifying the law.4

As the following enumeration demonstrates, almost all the reasons cited for frustration with the IRS really constitute arguments against the tax laws approved by politicians over the past 80 years--and for a fair, simple, flat, tax.

THE FEDERAL GOVERNMENT AS A TAX GOLIATH

The IRS is not only the most feared of government agencies, it also is one of the biggest and most expensive. The agency has more employees than the Central Intelligence Agency, Federal Bureau of Investigation, and Drug Enforcement Agency combined, and its budget makes it a bigger consumer of tax dollars than the Departments of Commerce, State, or the Interior.

The Numbers Speak for Themselves

WHAT IS A FLAT TAX?

A flat tax contains three core features, each designed to fix a major problem with the current tax code. These key features can be summed up in a single sentence: "All income should be taxed at one low rate and only one time, and the tax should be collected in the least intrusive way possible."

A single flat rate. Under the flat tax, income is taxed at one low rate. This insures that taxpayers are treated equally while addressing the problem of high marginal tax rates. It also promotes faster growth by minimizing the tax penalty against work, risk-taking, and entrepreneurship.

No bias against savings and investment. A flat tax eliminates the current code's bias against capital formation by making sure that no income is taxed more than one time. Because double taxation of capital income is a pervasive problem under current law, this reform will stimulate higher incomes and faster growth by minimizing the tax penalty on savings and investment.

Simplification. The flat tax eliminates provisions of the current code that result in tax preferences or tax penalties on certain behaviors and activities. In addition, a large amount of income is taxed at the source rather than at the recipient level, dramatically lowering paperwork and compliance costs. These changes would solve the problem of complexity, allowing taxpayers to file their individual returns on postcard-size forms. It would also guarantee that the tax code treats everyone equally.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


New Evidence

12,000 = The number of additional IRS employees needed to answer phone inquiries from confused taxpayers during tax filing season.5 Because taxpayers will need to know only the amount of their wages and the size of their families under a flat tax, additional personnel will not be needed.

$1,000 = The hourly collection quota placed on IRS agents auditing individual taxpayers in the San Francisco office.6 Although collection quotas violate the law, the current system is so complex that the IRS assumes mistakes will be found on every return. Errors will be very few under a simple and transparent flat tax.

62,000,000 = The number of lines of computer code required by the IRS to manage the current tax code.7 A simple flat tax will ease the IRS's ongoing computer problems dramatically.

1,420 = The number of appraisals of works of art that an IRS panel performed in order to tax the assets of dead people.8 Because double taxation under a flat tax does not exist, the absurdity of having the IRS value art would disappear with the death (estate) tax.

3,200 = The number of threats and assaults IRS agents experienced over a five-year period.9 A fair and simple tax system will reduce taxpayers' frustrations dramatically.

What We Already Knew

136,000 = The number of employees at the IRS and elsewhere in the government who are responsible for administering the tax laws.10 Because the number needed is dictated by the complexity of the tax code, fewer personnel will be needed under a flat tax, and the downsizing of the IRS will save taxpayers a significant amount of money.

$13,700,000,000 = The amount of tax money spent by the IRS and other government agencies to enforce and oversee the tax code.11 Both taxpayers and the economy will benefit from the spending reductions made possible by a flat tax.

17,000 = The number of pages of IRS laws and regulations,12 not including tax court decisions and IRS letter rulings. This page count would be reduced significantly by a flat tax.

5,557,000 = The number of words in the income tax laws and regulations.13 With a flat tax, there will be no need for a tax code that is nearly seven times longer than the Bible.

The IRS Paper Machine

With so many employees, so much money, and such a cumbersome tax code, it should come as no surprise that the IRS is one of the country's biggest paper-pushers.

New Evidence

820 = The number of pages added to the tax code by the 1997 budget act.14 A flat tax will slash it to a fraction of its current size.

250 = The number of pages needed to explain just one paragraph in the Internal Revenue Code.15 A simple flat tax will avoid needless IRS regulation.

271 = The number of new regulations issued by the IRS in 1997.16 By putting an end to constant social engineering, a flat tax will halt the IRS's constant rewriting of the tax rules.

261 = The number of pages of regulations needed to clarify the tax code's "arms-length standard" for international intercompany transactions.17

569 = The number of tax forms available on the IRS Web site.18 Only two postcard-size forms will be necessary under a flat tax: One for wages, salaries, and pensions, the other for business income.

What We Already Knew

31 = The number of pages of fine print in the instructions for filling out the "easy" 1996 1040EZ individual tax form.19 By contrast, individuals will need just one page of instructions to fill out a flat tax postcard.

8,000,000,000 = The number of pages in the forms and instructions the IRS sends out every year. Under a flat tax, the postcard-sized forms are virtually self-explanatory.20

36 = The number of times the paperwork the IRS receives would circle the earth each year.21 Complexity and paperwork will all but vanish under a simple flat tax that treats all citizens equally.

293,760 = The number of trees it takes each year to supply the 8 billion pages of paper used to file income taxes in the United States.22 A flat tax using two simple postcards obviously will be more friendly to the environment.

1,000,000,000 = The number of 1099 forms sent out each year to help the IRS track taxpayers' interest and dividend income.23 Under a flat tax, business and capital income taxes will be collected at the source, thereby eliminating this paperwork conundrum.

The IRS Briar Patch

Much to the chagrin of taxpayers, the IRS does not focus solely on generating paperwork. Tasked with enforcing the cumbersome tax code, the agency has numerous unwelcome contacts with taxpayers every year.

New Evidence

33,984,689 = The number of civil penalties assessed by the IRS in 1996.24 Because a flat tax will be so fair and simple, the IRS will have little reason to go after taxpayers.

10,000 = The number of properties seized by the IRS in 1996.25 Part of this problem is caused by the government's trying to take too much money from people, and part is caused by complexity. A flat tax will reduce the government's take and eliminate complexity.

750,000 = The number of liens issued by the IRS against taxpayers in 1996.26 A simple, low flat tax will result in fewer fights between the government and taxpayers.

2,100,000 = The number of IRS audits conducted in 1996.27 Without all the complex provisions in the code under a flat tax, the IRS will have few returns to audit.

85 = The percentage of taxpayers selected by the IRS for random audits who had incomes less than $25,000.28 A complicated tax code benefits the wealthy, who can fight back. A flat tax will be good news for those with more modest incomes.

47 = The percentage of taxpayers living in just 11 southern states subject to random audits.29 Because audits will decline dramatically under a flat tax, so will discriminatory audit patterns like this one.

What We Already Knew

10,000,000 = The number of corrections notices the IRS sends out each year.30 With a simple and fair tax system like a flat tax, mistakes will become rare.

190,000 = The number of disputes between the IRS and taxpayers in 1990 that required legal action.31 In a flat tax environment, there will be few potential areas of disagreement, and legal action will become scarce.

3,253,000 = The number of times the IRS seized bank accounts or paychecks in 1992.32

33,000,000 = The number of penalty notices the IRS sent out in 1994.33 Because a flat tax will eliminate complex parts of the tax code, the number of disagreements between taxpayers and the agency will plummet.

Do as They Say, Not as They Do

The IRS is quite strict with taxpayers who make mistakes, but the following examples illustrate that it would have a hard time living up to the standards imposed on taxpayers.

New Evidence

15 = The number of years the IRS believes it will need to modernize its computer system.34 A simple, flat tax will not require complex computer systems.

1,000,000 = The number of Americans who received tax forms with erroneous mailing labels in 1998.35

20 = The percentage error rate at the IRS for processing paper returns.36 Even children would be able to process postcard returns under a flat tax.

6,400 = The number of computer tapes and cartridges lost by the IRS.37 Once a flat tax is implemented, these tapes and cartridges could remain lost.

22 = The percentage of times reporters for Money magazine received inaccurate or incomplete information in 1997 when calling the IRS's toll-free hot line.38 To file a return under a flat tax, Americans will need to know only the size of their families and the amount of their wages, salaries, and pensions; they will not need to call the IRS.

40 = The percentage of times Money magazine reporters received wrong answers in 1997 in face-to-face visits at IRS customer service offices.39 A flat tax will be so simple that such mistakes will become almost non-existent.

$800,000,000 = The estimated cost to update the IRS's computers for the year 2000.40 Scrapping the tax code for a flat tax will allow the government to institute a simpler computer system.

500,000 = The number of address changes made to correct the master file by IRS employees each year.41

78 = The percentage of IRS audit assessments on corporations that eventually are disqualified.42 A flat tax will replace the onerous corporate tax with a simple, postcard-based system.

What We Already Knew

8,500,000 = The number of times the IRS gave the wrong answer to taxpayers seeking help to comply with the tax code in 1993 (taxpayers still are held responsible for errors that result from bad advice from the IRS).43 A flat tax will be so simple that taxpayers rarely--if ever--will need to call the IRS.

47 = The percentage of calls to the IRS that resulted in inaccurate information, according to a 1987 General Accounting Office study.44 A flat tax will free IRS personnel from the impossible task of deciphering the convoluted tax code.

5,000,000 = The number of correction notices the IRS sends out each year that turn out to be wrong.45 An error rate of 50 percent will be impossible under a flat tax.

40 = The percentage of revenue that is returned when taxpayers challenge penalties.46 Under a flat tax, penalties will become rare, so fewer penalties will be assessed incorrectly.

$5,000,000,000 = The amount of money that taxpayers were overcharged for penalties in 1993.47 After a flat tax goes into effect, such injustice will all but disappear.

3,000,000 = The number of women improperly fined each year because they have divorced or remarried.48 Taxing income at the source under a flat tax will eliminate such travesties.

10,000,000 = The number of taxpayers who will receive lower Social Security benefits because the IRS failed to inform the Social Security Administration about tax payments.49 A simple flat tax is likely to free enough IRS time and resources to fix this problem.

$200,000,000,000 = The amount of misstated taxpayer payments and refunds on the books of the IRS.50 The IRS is no more able to administer tax laws that defy logic than is the average taxpayer. A flat tax will rectify this problem.

64 = The percentage of its own budget for which the IRS could not account in 1993, according to an audit by the U.S. General Accounting Office.51

$8,000,000,000 = The amount the IRS spent to upgrade its computer system unsuccessfully.52 Under a flat tax, this money will be saved because the IRS no longer will need to track an impossibly complex and unfair tax system.

$23,000,000,000 = The total proposed price for the IRS's computerization and modernization plans by 2008.53

Being Compliant and Miserable on April 15

Sending huge amounts of tax money to Washington, D.C., is never pleasant. Having to incur huge compliance costs for the privilege of paying taxes, however, really rubs salt in the tax wound.

New Evidence

6,400,000 = The number of taxpayers who visited IRS customer service centers seeking answers to their tax questions in 1996.54 With a flat tax, few taxpayers will need help.

99,000,000 = The number of taxpayers trying to comprehend the tax system who called IRS hotlines in 1996.55 So long as a taxpayer knows his income and the size of his family under a flat tax, he will have nothing to worry about.

30 years = The number of years a dispute can last between the IRS and a corporation.56 Even one-year disputes will be rare under a flat tax.

8,000,000 = The increase in the number of taxpayers who will be subject to the alternative minimum tax by 2007.57 This absurd provision forces taxpayers to calculate their income two ways and then pay the government the higher of the two amounts. It will disappear under a flat tax.

$134,347,500,000 = The Clinton Administration's estimate of private-sector compliance costs.58 If the defenders of the status quo admit compliance costs are this high, the actual costs may well be even higher.

653 = The number of minutes the IRS estimates it takes to fill out a 1040 form.59 A flat tax postcard can be filled out in five minutes.

72 = The number of inches of height of the stack of tax forms in the Chrysler Corporation's tax return.60 A postcard return is only a fraction of one inch in height.

6,000,000 = The number of unanswered phone calls made to the IRS in January and February 1998.61 Considering that answered calls frequently result in mistakes, taxpayers who fail to get through probably should feel lucky.

2,400,000 = The number of phone calls to the IRS that resulted in busy signals in January and February 1998.62 A busy signal is better than a wrong answer because the IRS holds taxpayers liable for mistakes even if they are following IRS advice.

56 = The percentage of calls to the IRS in 1997 that went unanswered.63 Again, no answer is better than a wrong answer.

What We Already Knew

$157,000,000,000 = The amount spent by the private sector to comply with income tax laws.64 Under a flat tax, these costs will drop by more than 90 percent.

$7,240 = The average compliance cost incurred by all but the biggest 10 percent of corporations for every $1,000 of taxes paid in 1992.65 The radical simplification brought about by a flat tax will be a boon for small businesses that cannot maintain legal and accounting staffs to comply with the tax code.

50 = The percentage of taxpayers who feel compelled to obtain assistance in filling out their taxes each year.66

5,400,000,000 = The number of hours it takes Americans to comply with federal tax forms.67 With only two postcard-sized forms, compliance under a flat tax will require minutes, not hours.

2,943,000 = The number of full-time equivalent jobs spent on compliance.68 In the flat tax world, the cost of tax compliance will fall by more than 90 percent.

$3,055,680,000 = The market value of the tax preparation firm H&R Block, Inc., which opposes a flat tax.69 The company's opposition is understandable because a flat tax will allow anyone to fill out a tax return without paying an expert.

Even Experts Can't Figure Out the Forms

Jumping through all the tax hoops might not be so painful if taxpayers at least could be confident that the effort led to accuracy. The ultimate insult added to their injury, however, is that even "expert" advice is no guarantee of receiving correct answers to tax code questions.

New Evidence

$24,000,000,000 = The difference between what corporations said they owed and what the IRS said they owed in 1992--a gap the government admits is due to ambiguity and complexity in the code.70 A flat tax will eliminate the confusion embedded in the current system.

46 = The number of wrong answers Money magazine received in 1998 when it asked 46 different tax experts to estimate a hypothetical family's 1997 tax liability.71 Professional assistance will not be necessary with a simple, flat tax.

$34,672 = The difference in liability between the highest and lowest incorrect answers among the 46 professionals who failed to calculate the tax liability of Money magazine's hypothetical family.72 Such responses will be all but impossible under a flat tax.

$610 = The amount the hypothetical family would have overpaid on its 1997 taxes if it had used the answer that came closest to the actual tax liability (assuming, of course, that Money magazine's expert had filled out the tax return correctly).73 Any mistakes, especially large ones, will be unlikely under a flat tax.

45 = The number of professional tax preparers who came up with different answers when asked by Money magazine in 1997 to fill out a hypothetical family's 1996 tax return.74

45 = The number of professional tax preparers who came up with wrong answers when asked by Money magazine in 1997 to fill out a hypothetical family's 1996 tax return.75

76 = The percentage of professional tax preparers who missed the right answer by more than $1,000.76 This kind of result will be impossible under a flat tax.

$58,116 = The difference between the lowest estimate of the family's tax bill and the highest estimate in Money's survey of tax professionals.77 Because the complexities in the tax code will disappear under a flat tax, mistakes like this will, too.

$81 = The average hourly fee charged by the professional preparers who came up with the 45 wrong answers.78 Taxpayers will pay nothing to calculate their own taxes on postcards under a flat tax.

What We Already Knew

50 = The number of different answers that 50 tax experts gave Money magazine in 1988 when asked to estimate a hypothetical family's tax liability.79 Under a flat tax, taxpayers will not need to consult tax preparers, much less run the risk of paying penalties for wrong answers.

50 = The number of different answers Money magazine received in 1989 when it asked 50 different tax experts to estimate a hypothetical family's tax liability.80

48 = The number of wrong answers Money magazine received in 1990 when it asked 50 different tax experts to estimate a hypothetical family's tax liability.81

49 = The number of different answers Money magazine received in 1991 when it asked 50 different tax experts to estimate a hypothetical family's tax liability.82

50 = The number of wrong answers Money magazine received in 1992 when it asked 50 different tax experts to estimate a hypothetical family's tax liability.83

41 = The number of wrong answers Money magazine received in 1993 when it asked 50 different tax experts to estimate a hypothetical family's tax liability (9 of the original volunteers did not bother even to respond).84

The Never-Ending Shell Game

The needless complexity of the current tax code helps explain the reasons that both the IRS and private tax experts frequently make mistakes. Another reason that taxpayers have a problem complying with the law is that politicians have made the tax code a moving target.

New Evidence

824 = The number of changes in the tax code accompanying the 1997 tax cut.85 A flat tax will put an end to constant social engineering.

285 = The number of new sections in the tax code created by the 1997 budget act.86 A flat tax will eliminate most of the tax code.

3,132 = The number of pages needed by the Research Institute of America to explain the changes in the tax law in 1997.87 Flat tax postcards need just one page of instructions.

11,410 = The number of tax code subsection changes between 1981 and 1997.88 A flat tax will eliminate most of those subsections.

160 = The percentage increase in the stock value of tax preparation firms in the three-month period during and after enactment of the 1997 budget.89

54 = The number of lines on the new capital gains form, up from 23 before the 1997 budget deal.90 Because double taxation will end under a flat tax, the capital gains form will disappear.

What We Already Knew

878 = The number of times major sections of the tax code were amended between 1955 and 1994.91 A flat tax will eliminate today's confusingly complex tax code and replace it with a simple system that does away with constant tinkering and social engineering.

100 = The increase in the number of forms between 1984 and 1994.92 A flat tax will eliminate all 100 forms.

9,455 = The number of tax code subsections changed between 1981 and 1994.93 Under a flat tax, politicians will not be able to use the tax code to micromanage economic or social behavior.

578 = The percentage increase in the number of tax code sections between 1954 and 1994 that deal with major segments of tax law.94 Endless changes in tax law will grind to a halt under a flat tax.

5,400 = The cumulative number of changes in tax law since the 1986 Tax Reform Act.95 Most, if not all, of these changes add compliance costs to the economy--costs that a flat tax will reduce substantially or eliminate.

$20,500,000,000 = The amount of lost income the economy suffered in 1993 as a result of the economic uncertainty in the business community caused by the constant manipulation of the tax code.96 To help prevent politicians from undermining business planning by constantly changing the tax laws, a flat tax law should include a supermajority provision blocking such tax rate increases.

The Augean Stables

The problem is not the IRS, but the politicians who created the incomprehensible tax code and those who refuse to reform the system. Politicians also are practically the only people in the country who benefit from a complex and constantly changing tax code.

New Evidence

$400,000,000 = The amount of the special tax break for one corporation inserted in the tax code in 1986 at the urging of Dan Rostenkowski (D-IL), then chairman of the House Ways and Means Committee.97 A flat tax will wipe out provisions for special-interest groups.

What We Already Knew

$413,072 = The average amount of political action committee contributions received by members of the House of Representatives tax-writing committee during the 1994 election cycle.98 A flat tax will reduce special-interest corruption and eliminate the ability of politicians to use the tax code to reward friends and punish enemies.

12,609 = The number of special-interest organizations officially represented by congressional lobbyists.99 A flat tax will wipe out all special preferences, loopholes, deductions, credits, and tax shelters.

$3,200,000,000 = The total amount earned by Washington, D.C., lobbyists in 1993.100 By taking away the playing field for special-interest tinkering, a flat tax will clean up political pollution.

2 = The number of IRS offices in Washington, D.C., made available to Members of Congress and their staffs.101 With someone else doing their taxes--free--it is little wonder that Members of Congress do not understand the public support for a flat tax.

Why Johnny Refuses to Pay

There comes a point at which taxpayers simply give up. Some are driven into the underground economy by the sheer complexity of the system. Others conclude that an unfair tax code has no moral legitimacy and simply refuse to comply.

What We Already Knew

$127,000,000,000 = The amount of taxes not paid as a result of tax evasion.102 A fair, simple, flat tax will reduce tax evasion.

10,000,000 = The number of people who unlawfully do not file tax returns.103 By reducing both the tax burden and compliance costs, a flat tax will bring people out of the underground economy.

3,500,000 = The number of people who do not file who would be eligible for refunds.104 Perhaps more than any other number, the millions of people who fail to file in order to claim their tax refunds reveals just how intimidating the tax code has become.

4 = The number of times a single dollar of income can be taxed under the current system, counting the capital gains tax, corporate income tax, personal income tax, and death (estate) tax.105 By eliminating double taxation, a flat tax will make sure the government treats all income equally and will end one of the biggest causes of tax evasion and complexity in the current tax code.

100,000 = The number of Internet sites found by one search engine when queried for the phrase "tax shelter."106 Because a flat tax will eliminate all discrimination in the tax code and allow people to keep a greater share of their income, tax shelters will almost vanish after reform.

Enough Is Enough

The damage caused by the current tax code, both to the economy and to the body politic, is reaching crisis proportions. Insulated from the effects of their own handiwork, however, politicians are very likely to be the last ones to understand just how indefensible the system has become. Perhaps these real examples of IRS abuse will help them to understand the problem:

New Evidence

$3,500 = The amount one woman was forced to pay twice, even though the IRS eventually admitted the debt had been owed--and paid--by her former husband.107

$210,260 = The amount the IRS tried to garnish from the wages of a woman for the back taxes her husband had owed before their marriage.108

$26 = The amount the IRS seized from a 6-year-old's bank account because her parents owed money.109

$70,000 = The amount demanded by an IRS agent who was threatening to send a couple to jail in a case that the tax court subsequently dismissed because the IRS's claim "was not reasonable in fact or in law."110

$500,000 = The amount the IRS was forced to pay a taxpayer after engaging in a vendetta against him, including putting the innocent man in jail for four months.111

$6,484,339 = The amount demanded by the IRS from the family of a victim of Pan Am flight 103, based on the assumption of a future settlement.112

$900,000 = The amount a small businessman was fined after being entrapped by his accountant, a paid informer for the IRS.113

$5,300,000 = The amount the IRS paid its informants in 1993.114

25 = The percentage of households with incomes over $50,000 that would pay an inaccurate assessment from the IRS rather than fight.115

What We Already Knew

$46,806 = The amount of tax penalty imposed on one taxpayer in 1993 for an alleged underpayment of 10 cents.116

1,300 = The number of IRS employees investigated and/or disciplined for improperly viewing the tax returns of friends, neighbors, and others.117

$155 = The amount of penalty imposed on a taxpayer in 1995 for an alleged underpayment of 1 cent.118

50 = The percentage of top IRS managers who admitted they would use their position to intimidate personal enemies.119

$14,000 = The amount allegedly owed by a daycare center that was raided by armed agents, who then refused to release the children until parents pledged to give the government money.120

80 = The number of IRS agents referred for criminal investigation on charges of taking kickbacks for fraudulent refund checks.121

$3,000,000,000 = The dollar assets of Princeton/Newport, an investment company that was forced into liquidation after 40 armed federal agents raided the company on suspicion of tax evasion--only to have the IRS later conclude that Princeton/Newport actually had overpaid its taxes.122

$10,000 = The fine imposed on one taxpayer for using a 12-pitch typewriter to fill out his tax forms instead of a 10-pitch typewriter.123

109 = The number of envelopes containing unprocessed information found in the trash at the IRS's Philadelphia Service Center.124

GRAND TOTAL: More than 737 billion incredible-but-true reasons to simplify the tax code with a flat tax.

WHAT THESE NUMBERS REALLY MEAN

These horror stories and statistics are not necessarily evidence that individual IRS agents are bad people, or that tax administrators want to violate people's rights. Although examples of unwarranted behavior are included in this discussion, the key problem they illustrate is that current tax law is so arbitrary and incomprehensible that even government agents in charge of enforcing the law cannot make sense of it.

The only way to address these problems is through fundamental reform. A flat tax will reduce the power of the IRS dramatically by eliminating the vast majority of possible conflicts. In a system in which the only information individuals are obligated to provide is their total income and the size of their families, much of the uncertainty and fear regarding paying taxes will disappear.

Most individuals never have to experience the greater complexities of paying corporate income taxes; still, they can appreciate the fact that a flat tax will generate dramatic savings for business. Under a flat tax, the money that businesses now spend to comply with the tax code will become available instead for higher wages and increased investment, thereby helping the United States to become more competitive.

Although the key principle of a flat tax is equality, it turns out that a system based on taxing all income just one time at one low rate also promotes simplicity. To understand the reasons that introducing a flat tax would lead to such a dramatic reduction in both tax code complexity and compliance costs, consider the following numbers:

0 = The number of taxpayers under a flat tax who will have to calculate depreciation schedules.

0 = The number of taxpayers under a flat tax who will have to keep track of itemized deductions.

0 = The number of taxpayers under a flat tax who will need to reveal their assets to the government.

0 = The number of taxpayers under a flat tax who will lose their farms or businesses because of the death (estate) tax.

0 = The number of taxpayers under a flat tax who will have to pay a double tax on their capital gains.

0 = The number of taxpayers under a flat tax who will have to compute a phase-out of their personal exemption because their incomes are too high.

0 = The number of taxpayers under a flat tax who will be subject to the alternative minimum tax--those forced to calculate their tax bill two different ways and then to pay the government the greater of the two amounts.

0 = The number of taxpayers under a flat tax who will have to pay taxes on overseas income that already was taxed by the government of the country in which the income was earned.

0 = The number of taxpayers under a flat tax who will have to pay taxes on dividend income that already was taxed at the business level.

0 = The number of taxpayers under a flat tax who will be taxed on interest income that already was taxed at the financial institution level.

CONCLUSION

Those who urge policymakers to "fix" the IRS should realize that condemning the agency itself will not solve the intractable problems of the current tax code. Furthermore, enacting a "taxpayer bill of rights" will accomplish little if provisions of the tax code that constitute the underlying problem are left in place. At least two versions of a "taxpayer bill of rights" previously enacted into law have had little effect.

Americans rapidly are approaching the level of anger toward unfair, capricious, and oppressive taxation that gave rise to the American Revolution in 1776. This anger is directed at an immense and impersonal government agency that often operates outside the standards it imposes on taxpayers. Americans should be angry, but not at the IRS: They should direct their anger toward the Members of Congress responsible for enacting the laws that created today's tax code.

The only effective way to enhance com

Endnotes

1 "National Voter Survey," The Polling Company, Washington, D.C., March 17-24, 1997.

2 People Magazine Annual Readers' Poll, People, January 8, 1990.

3 Shirley Peterson, "Death to the Tax Code," The New York Times, July 29, 1995.

4 "Tax Report; A Special Summary and Forecast of Federal and State Tax Developments," The Wall Street Journal, March 26, 1997, p. A1.

5 Stephen Barr, "At Hub for Tax Questions, An Effort to Give Meaning to 'Service' in IRS," The Washington Post, March 18, 1998.

6 Jeffrey H. Birnbaum, "UNBELIEVABLE! The Mess at the IRS Is Worse Than You Think," Fortune, April 13, 1998.

7 Ibid.

8 "IRS Releases Report on Activities of Art Advisory Panel During 1997," Daily Tax Report, March 11, 1998.

9 Rob Wells, "Senate Hearings on IRS to Begin," Associated Press wire story, September 23, 1997.

10 Arthur P. Hall, "Growth of Federal Government Tax `Industry' Parallels Growth of Federal Tax Code," Tax Foundation Special Report No. 39, September 1994.

11 Ibid.

12 Daniel J. Pilla, "Why You Can't Trust the IRS," Cato Institute Policy Analysis No. 222, April 15, 1995.

13 Arthur P. Hall, "Compliance Costs of Alternative Tax Systems," Tax Foundation Special Brief, June 1995.

14 Birnbaum, "UNBELIEVABLE! The Mess at the IRS Is Worse Than You Think."

15 "Taxpayer Compliance: Analyzing the Nature of the Income Tax Gap," Statement of Lynda D. Willis, U.S. General Accounting Office, before the National Commission on Restructuring the Internal Revenue Service, January 9, 1997.

16 U.S. General Accounting Office, by facsimile to author, March 31, 1998.

17 U.S. General Accounting Office, Tax Gap Symposium, GGD-95-157, June 2, 1995.

18 See http://www.irs.ustreas.gov/forms_pubs/forms.html.

19 Peterson, "Death to the Tax Code."

20 Ibid.

21 Elizabeth McDonald, "Breakdown at the IRS," Worth, March 1995.

22 Robert E. Hall and Alvin Rabushka, The Flat Tax (Stanford, CA: Hoover Institution Press, 1995).

23 Ibid.

24 U.S. Department of the Treasury, Internal Revenue Service Data Book, October 1, 1995 to September 30, 1996.

25 Birnbaum, "UNBELIEVABLE! The Mess at the IRS Is Worse Than You Think."

26 Ibid.

27 U.S. General Accounting Office, IRS' Use of Random Selection in Choosing Tax Returns for Audit, GGD-98-40, February 5, 1998.

28 Associated Press, "IRS Targets Poor in South in Random Audits Program," The Washington Times, March 1, 1998.

29 Ibid.

30 Pilla, "Why You Can't Trust the IRS."

31 James L. Payne, "Unhappy Returns: The $600 Billion Tax Ripoff," Policy Review, Winter 1992.

32 James Bovard, Lost Rights: The Destruction of American Liberty (New York, NY: St. Martin's Press, 1994).

33 "33 Million Penalty Notices," The Wall Street Journal, April 17, 1995.

34 Birnbaum, "UNBELIEVABLE! The Mess at the IRS Is Worse Than You Think."

35 Ibid.

36 Testimony by Senator Robert Kerrey (D-NE) before the House Ways and Means Committee, September 16, 1997.

37 Timothy W. Maier and Sean Paige, "A New Tax Revolt," Insight, November 3, 1997.

38 Frank Lalli, managing editor of Money magazine, Testimony before National Commission on Restructuring the Internal Revenue Service, April 17, 1997.

39 Ibid.

40 John Berlau, "IRS Countdown to Meltdown," Insight, November 3, 1997.

41 James Bovard, "The IRS vs. You," The American Spectator, November 1995.

42 U.S. General Accounting Office, Tax Gap Symposium.

43 Pilla, "Why You Can't Trust the IRS."

44 Carl Horowitz, "The Hidden Cost of Higher Taxes," Investor's Business Daily, September 16, 1993.

45 Pilla, "Why You Can't Trust the IRS."

46 Ibid.

47 Ibid.

48 McDonald, "Breakdown at the IRS."

49 Ibid.

50 Ibid.

51 Pilla, "Why You Can't Trust the IRS."

52 Andrew Serwer, "The Taxman Cometh--Head for the Hills!" Fortune, March 3, 1997.

53 Shelley L. Davis, Unbridled Power: Inside the Secret Culture of the IRS (New York, NY: Harper Business, 1997).

54 U.S. General Accounting Office, IRS Faces Challenges in Measuring Customer Service, GGD-98-59, February 23, 1998.

55 Ibid.

56 U.S. General Accounting Office, Tax Gap Symposium.

57 H&R Block, "Tax Simplification Proposals: 1998," accompanying letter from Robert Weinberger, vice president, government relations, to Jonathan Talisman, deputy assistant secretary of tax policy, U.S. Department of the Treasury, February 9, 1998.

58 Budget of the United States Government, FY1999, Appendix (Washington, DC: U.S. Government Printing Office, 1998), p. 793.

59 Privacy Act and Paperwork Reduction Act Notice, Internal Revenue Service, 1998 1040 form instructions.

60 John Steele Gordon, "Abolish the Corporate Income Tax," The Wall Street Journal, March 11, 1998.

61 Barr, "At Hub for Tax Questions."

62 Ibid.

63 Ibid.

64 Arthur P. Hall, "Compliance Costs of Alternative Tax Systems, II," Tax Foundation Special Brief, March 1996.

65 Ibid.

66 Pilla, "Why You Can't Trust the IRS."

67 Arthur D. Little, "Development of Methodology for Estimating the Taxpayer Paperwork Burden," Final Report to the Department of Treasury, Internal Revenue Service, June 1988.

68 Payne, "Unhappy Returns: The $600 Billion Tax Ripoff."

69 Based on stock price as of 2:40 p.m. on February 28, 1997.

70 U.S. General Accounting Office, Tax Gap Symposium.

71 Joan Caplin, "6 Mistakes Even the Tax Pros Make," Money, March, 1998.

72 Ibid.

73 Ibid.

74 Teresa Tritch, "Why Your Tax Return Could Cost You a Bundle," Money, March 1997.

75 Ibid.

76 Ibid.

77 Ibid.

78 Ibid.

79 Greg Anrig, Jr., "Even Seasoned Pros Are Confused This Year," Money, March 1988.

80 Ibid.

81 Denise M. Topolnicki, "The Pros Flub Our Third Annual Tax-Return Test," Money, March 1990.

82 Teresa Tritch and Deborah Lohse, "The Pros Flub Our Tax Test (Again)," Money, March 1991.

83 Teresa Tritch and Deborah Lohse, "Tax Payers, Start Worrying," Money, March 1992.

84 Teresa Tritch, "Keep an Eye on Your Tax Pro," Money, March 1993.

85 Janet Novack and Laura Saunders, "Torture by Taxation," Forbes, August 25, 1997.

86 Ben Wildavsky, "A Hike in Complexity," National Journal, August 23, 1997.

87 Tom Herman, "Tax Report," The Wall Street Journal, August 27, 1997.

88 Harold Apolinsky, "Need for Ten Year Moratorium," Small Business Council of America, August 14, 1997.

89 Brian Wesbury, "Do Taxes Matter?" Griffin, Kubik, Stephens, & Thompson, Inc., October 9, 1997.

90 Albert B. Crenshaw, "True to Form, Tax Time Gets Harder," The Washington Post, March 7, 1998.

91 Arthur P. Hall, "The Cost of Unstable Tax Laws," Tax Foundation Special Report No. 41, October 1994.

92 "33 Million Penalty Notices," The Wall Street Journal, April 17, 1995.

93 Apolinsky, "Need for Ten Year Moratorium."

94 Hall, "Compliance Costs of Alternative Tax Systems."

95 Representative Richard K. Armey, "How Taxes Corrupt," The Wall Street Journal, June 19, 1996.

96 Hall, "The Cost of Unstable Tax Laws."

97 "Packwood Shows System's Ills...," Gazette-Times (Corvallis, Oregon), February 26, 1998.

98 Press release, "1994 PAC Activity Shows Little Growth over 1992 Level, Final FEC Report Finds," Federal Election Commission, 1995.

99 Information from Office of the Clerk, U.S. House of Representatives.

100 Armey, "How Taxes Corrupt."

101 Pilla, "Why You Can't Trust the IRS."

102 McDonald, "Breakdown at the IRS."

103 Ibid.

104 Peterson, "Death to the Tax Code."

105 Daniel J. Mitchell, "Taxes, Deficits, and Economic Growth," Heritage Foundation Lecture No. 565, June 17, 1996.

106 See http://www.altavista.com/cgi-bin/query?pg=q&what=what=web&fmt=.&q=tax+shelter.

107 Shawn Rychling, "Driving a Stake into the IRS," Citizens Against Government Waste Waste Watch, Fall 1997.

108 Ann Reilly Dowd, "Money Audits the IRS," Money, January 1997.

109 Ibid.

110 Bovard, "The IRS vs. You."

111 Ibid.

112 Ibid.

113 Ibid.

114 Ibid.

115 Dowd, "Money Audits the IRS."

116 Bovard, Lost Rights.

117 Stephen Barr, "1,300 IRS Workers Accused of Snooping at Tax Returns: Employees Used Computers to Peek at Friends' Files," The Washington Post, July 19, 1994.

118 Taxpayer letter to The Heritage Foundation, February 7, 1996, accompanied by copy of IRS form 941.

119 Serwer, "The Taxman Cometh."

120 "IRS Invaded Day Care Center: Parents Claim Children 'Held Hostage,'" Dollars & Sense, April 1985.

121 "Breach of Trust at the IRS," St. Petersburg Times, August 8, 1993.

122 Bovard, Lost Rights.

123 Ibid.

124 Davis, Unbridled Power.

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy