Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
II. Abolish the IRS As We Know It and Strengthen the Federal System
The scandalous misuse of the power of the IRS bureaucracy requires more than legislation requiring political neutrality in its administration. The personal and corporate income tax codes have increased in size and complexity enormously. The size of the bureaucracy and the costs of administering the personal and corporate income taxes are beyond belief. The costs to taxpayers to comply with the law runs into hundreds of billions of dollars. The current income tax laws, both personal and corporate have to be repealed and replaced.
Prof. Arthur Laffer and his colleagues at The Laffer Center calculated the economic burden caused by the tax code’s complexity in April, 2011. They estimated the total cost of administering the personal and corporate income tax, which yielded about $1.4 billion in 2008, to be $431.1 billion, or 30 percent of total income tax revenue. They break the cost down as follows:
Thirty percent for administration and compliance costs is outrageous; even ten percent for just cash outlays is excessive. The cost of ad ministering sales taxes is on the order of two percent which is one of the reasons given by many economists for recommending substituting the Fair Tax for the personal income tax.
But the Fair Tax is much less progressive than the personal income tax and progressivity is one of the generally-accepted principles of taxation. The others are adequacy (raising the required revenues), expense of administering the tax, economy and convenience to the taxpayer, and taxes levied on the benefit principle, so-called user taxes (taxes based on the benefits a particular taxpayer or a unique class of taxpayers derive from a given government expenditure). The current income tax system seriously violates the expense and the cost and convenience principles of taxation.
We propose that the personal income tax be limited to a progressive tax on wages and salaries, interest, and dividend income with only a standard deduction, not an itemized one, and a deduction for dependents. We proposed the substitution for the corporate and proprietor’s income taxes of a business tax in the form of a tax at a single fixed rate on the capitalized value of the enterprise in place of the corporate income tax and taxes on proprietorships and partnerships. The advantages of these substitutions for the current personal and corporate income taxes are substantial.
Limiting the personal income tax to earned income with only a deduction for dependents and a standard deduction means that for the vast majority of taxpayers, the employer’s return of wages and salaries would obviate the need to file a personal return. Those working for more than one employer, those unemployed part of the tax year, and those with interest income would have to continue to file returns. The principal objections are likely to arise from the end of the deductions for larger than average housing expenses, charitable contributions, taxes, medical expenses, etc. But if those deductions are allowed, other taxpayers are involuntarily bearing part of the burden and making an involuntary contribution to housing costs, charities not of their choosing, etc. Renters and home-owners would be treated alike. Of course, home builders and charities will scream that they will be affected.
The advantages to taxing businesses on their capital value is that the many actions taken by businesses to avoid the income tax, outsourcing abroad to low tax jurisdictions, trying to create artificial capital gains by buying back their own stock, and other practices, will be to no avail. The only alternative is to become poorer. It is a progressive tax because business assets are distributed progressively.The income tax has long been known by economists to inhibit work and encourage leisure. It can be argued that a tax on capital value will deter investment but that would be to forego income which would no longer be taxed. There will be an increased incentive to innovate and become more productive and thereby earn increased business income which would not be taxed. The yield of the tax, even though the rate would be low, would be as much as the yield of the current income tax and cost much less to administer. Compliance costs would be virtually nil whereas compliance costs for the corporate income tax is astronomical.
Thus under this proposal, direct costs of administering the tax and compliance costs by taxpayers would be diminished, we estimate, by 90 percent or more to $43 billion instead of $431 billion. The enormous waste of resources incurred by the existing tax system would be eliminated. The economic gains to the society would be huge. (And it offers the opportunity as we argued in Part I to restore the power of the States in our federal system. We also suggested in Part I, that all taxes on owners of real estate should be reserved to the States.)
Comment by Robert Hopkins, 5/30/2013:
Nobody can trust the IRS now.
Comment by Terry Riney, 5/31/2013:
If the WR Grace Commission is correct 99% of the Federal Income Tax is used to pay interest on the debt. Probably to the illegal Federal Reserve. Before about 1916 we had no income tax and the country boomed. I have read that the income tax on individuals was started during WWII to help pay for the war The Govt said look at all this money coming in why stop it. So Death and Taxes came to life. So the ONLY real solution is to abolish the Fed and their collection agency the IRS.
No new flat tax fair tax ETC ETC And if the fed is not abolished most the tax scheme started will just go to the fed again. Do not fall for the con that we need an income tax.
Real Estate Taxation
Journal of Economic Literature:
Atlantic Economic Journal: