The tax reform moment

Rupert Murdoch took some heat for observing on Twitter, “Growing IRS scandal makes perfect case for flat tax and abolition all deductions.  Nothing could be fairer and abuse free.”

Several responses took Murdoch to task because the abusive treatment of certain groups applying for tax-exempt status, based on their politics, doesn’t have any direct relationship with the progressive income tax system, or plans to replace it.

But if I might be a bit more charitable to Murdoch, I think he was trying to make the broader case that a Flat Tax system would greatly reduce the size and power of the IRS.  If his suggestion is taken literally, and all deductions are abolished, it follows that no one would be applying for any sort of tax-exempt status at all.  One of the complaints raised by the groups targeted in the IRS scandal is that it put them at a competitive disadvantage against liberal groups, which sailed right through the Tax Exempt Organizations unit and secured approval in a matter of weeks – even when they were actually violating tax law at the time, as in the case of the Barack H. Obama Foundation, run by the President’s half-brother.  This isn’t just a scandal about those who were given a hard time; it’s also about those who weren’t.

Take all of this power and discretion away from the IRS, reduce it to processing a massive pile of postcard-sized tax returns every quarter, and you won’t have any more scandals like the one currently gripping Washington.  You also won’t have as many opportunities for politicians to control our behavior or reward favored constituencies by modifying the tax code in countless non-scandalous, but nonetheless corrupt ways.

The tax system really should be the fairest, flattest, most efficient method of funding the government, dispersing the burden as evenly and widely as possible.  It shouldn’t provide new, surreptitious methods for the government to exercise power over us.  And the tax burden should be clearly understood by every American, not hidden with quick-and-painless paycheck deductions everyone forgets about, or concealed behind impenetrable layers of pass-through corporate taxation.  No citizen of the United States fully understands his tax burden at the moment, and of course the government feels no compulsion to limit its spending to anywhere near the amount of revenue it takes in.

If we don’t understand these vital attributes of government, how can we truly exercise our electoral freedom by casting fully informed votes?  Our political rhetoric is filled with talk of “choice.”  Choice is only meaningful in the presence of accurate information about costs, benefits, and consequences.  That’s why business entities can be sued for fraud – when they lie to attract customers, those customers are not freely choosing to engage in commerce with them.  There are no more thoroughly defrauded “customers” on Earth than U.S. taxpayers, who actually were referred to as customers by Acting IRS Commissioner Steven Miller during House Ways and Means Committee  hearings last Friday.

The Fair Tax, which would shift the burden of taxation to a national sales tax, would also strip Washington of powers that invite political abuse.  Politicians love to play a little game where they introduce new taxes by claiming they’ll only apply to a few ultra-rich people, but they end up affecting nearly everyone.  The Alternative Minimum Tax was sold this way – it was only supposed to hit one hundred and fifty-five super-wealthy individuals when it was introduced in the late 1960s, but now it slams into more than 30 million people per year.  The income tax itself was originally presented as a very modest surtax on the richest Americans.

Once a new tax is firmly in place, the rules change, and suddenly everyone is getting soaked… and then a growing constituency at the bottom is inexorably removed from the tax rolls, becoming a reliable constituency for Big Government benefits they don’t see themselves having to pay for.  They’re not entirely correct in that belief, because they still end up paying a lot of hidden taxes, but they see themselves as “free riders.”

There would be no way to play such a game with the Fair Tax, or the kind of simple Flat Tax Rupert Murdoch endorsed, because cranking up the tax rates would affect just about everyone.  A standard deduction would leave a fairly small group without skin in the Flat Tax game, but the resistance to rate increases from the far larger population that did pay them – by writing a check to the IRS every quarter – would be formidable.  Almost the entire populace would be very skeptical of Fair Tax rate increases, which they would pay every time they made a purchase.

Both Flat and Fair Tax systems could be corrupted, much as the relatively simple income tax imposed on our great-grandparents was twisted into the smoke-filled labyrinth of shadows and pitfalls we currently navigate.  Special exemptions could be introduced, a flat system with only one or two rates could be made more “progressive,” special Fair Tax rates could be created for certain goods favored or disdained by the political class… there are lots of ways any system could go wrong.

But maybe the current atmosphere of scandal and abuse surrounding the IRS will help Americans realize they’re currently living in just about the worst of all possible worlds, short of collectivist horror shows like communism.  Almost everyone reading this is technically a “tax criminal,” in violation of some obscure requirement.  Expensive professional assistance is necessary for even the most well-meaning business owner to comply with the law, and even the IRS itself gets tax questions wrong with frightening regularity.  A great deal of our behavior is conducted – or abandoned – in fear of the tax code.  Bad investments are made to take advantage of its loopholes, while good money is sheltered instead of finding productive opportunities.

And now we’re facing the ugly realization that our political discourse – held in reverence by most Americans, at every point on the political spectrum – has been corrupted by the IRS.  We should not hesitate to bring the miscreants to justice, no matter what office they hold, but we should also do some hard thinking about the offices themselves.