During a presidential election year, so-called second tier candidates look for any means possible to grab the attention of the electorate and pull themselves up into the top-tier. One of the most popular maneuvers is to call for an end to the Federal Income Tax and/or an end to the Internal Revenue Service.
I admit right here that I come from a conservative/Libertarian background for the majority of my life and have never been a big fan of either the IRS or the income tax. But then something happened – I became more educated about both and my viewpoint has changed dramatically.
Before I tell you why the IRS and the income tax are never going away, I’d like to make something clear: do not confuse my support of the IRS and income tax with support for runaway government spending, the inflationary printing of money, congressional earmarks and the like. I believe that there are things governments should spend money on such as national defense, court systems, roads and other essentials. However, the federal government spends enormous amounts of money on activities it shouldn’t be involved in. You’ll get no disagreement from me on this.
Now, back the IRS and the income tax. If you accept the premise that the government should fund certain activities, then you must also accept that the money has to come from somewhere, hence taxes.
A case is often made for a national sales tax. While appealing in theory, some remnants of the IRS would still be necessary to verify actual levels of income. Why? Because a sales tax is so regressive in its nature that almost certainly the federal government would provide rebates (or “pre-bates”) to lower income people to help them offset the impact of the sales tax. But the real problem with a national sales tax arises from the level that would need to be charged and what would result. This election year a sales tax has been floated at rate of twenty-three percent. A sales tax rate at this level will most undoubtedly result in a thriving black market. If you think we have a violence problem surrounding the illegal sale of narcotics in the country, wait until you see the criminal activity leap when nearly everything becomes a candidate for back-alley sales. You won’t have to be an addicted crack-head to fuel this movement, merely a regular Joe who wants to save five hundred dollars on a plasma television.
The tax code, I learned, while primarily concerned with creating revenue, is also a tool for economic change and social influence. Consider the case where the economy is suffering. Congress can enact tax legislation that provides incentives, such as immediate expensing, for capital equipment purchases. And, in fact, this has just recently occurred, as the economic stimulus package just agreed to between Congress and the president provides an immediate expensing of fifty percent for purchases of new capital equipment, as opposed to depreciating it over many years. I prefer this method of economic stimulus much more than the oft-inflationary tactic of lowering interest rates, which has the effect of lessening the value of all those dollars you’ve worked so hard to save for retirement.
The complexity of the tax code is mind-boggling, particularly to the layman. If one takes up the academic study of taxation, there is a foundation that actually has both rhyme and reason. It is the details above and beyond the foundation where the inordinate complexity comes in. However, this complexity is not the result of an intentioned, thought-out plan to confuse you into oblivion. Rather, it is a response to you, the taxpayer. Most people think of money changing hands as cashing their paycheck, going to Wal-Mart and paying their bills. The reality is that there are innumerable ways for money and consideration to change hands. The tax code as it exists today is the result of an “arms-race” of sorts, between those who make the money and those want a piece of it. Think of money as water, our economy as an enormous mountain and the tax code as little barriers erected along the mountain side, intended to prevent some of the water from reaching the base of the mountain. What happens is that water continually flows over and around the barriers, looking for new ways to make it to the bottom of the mountain. In the same way, companies and individuals continually look for ways to make transactions that will skirt the letter of the (tax code) law. Once a successful way has been found, the tax-man often takes the inventor of this new way to tax court. Some times the IRS wins and some times they lose. Believe it or not, the IRS does lose quite often in Tax Court. When they win however, the results are codified in a new treasury regulation or revenue procedure or revenue ruling which has the effect of law. This process is repeated until you have the tax-code that we have. It’s a series of actions and reactions
The ability to influence social behavior via the tax code is not a power accorded to the government in our founding documents and I certainly don’t advocate it, but the power exists and the reality of the situation is that Washington simply does not divest itself of power it has acquired. Let me give you a simple example. The Hope college credit is available to students in their first two years of college, or to their parents, assuming the parents are paying the tuition. The taxpayer becomes ineligible for the Hope credit if the student has been convicted of a narcotics-related felony. Apparently, assault, robbery and other such felonies do not disqualify one from eligibility for the Hope credit, just drug use or sales. Clearly this is an example of attempting to influence behavior through the tax code, and, as I said earlier, Congress simply does not divest itself of this sort of power, regardless of what any presidential candidate may promise.
Another reason that the complex tax code will never be completely replaced by flat tax or a sales tax is purely political in that the current code provides the flexibility for each major political party to “throw bones” to their constituents and not dramatically affect the amount of revenue that the income tax brings in. For example, Republicans like to lower rates paid by business and then campaign to those affected as having “delivered the goods”. Democrats meanwhile like to raise rates on business and the wealthy and then flaunt it to their constituents, the low and middle classes. That this does not help the poor and is merely the politics of “sticking it to the rich” is of course pandering of the worst possible kind. You see, politicians’ every move is driven by voters and voters are driven by a “what have you done for me lately” attitude. In his book “Hardball”, author and political commentator Chris Matthews gives a real-world example of exactly this from his days as a young staffer in Washington:
“Soon after I went to work in the Senate, my boss, Frank Moss of Utah, decided to offer an amendment I had drafted. It dealt with the minimum wage. I had noticed that, over the years, the minimum-wage increases periodically approved by Congress consistently followed rises in cost of living and in productivity. The amendment I recommended to the Senator would have pegged annual minimum-wage increases to these two indices automatically. I expected it to attract considerable support from the pro-labor senators on the Democratic side of the aisle, but it claimed just fifteen votes. Later I would learn the reason. Democratic politicians were not about to give up the opportunity to raise the minimum wage every few years, the kind of sugarplum that helped them with the working people of their districts and kept labor involved in the party legislative agenda.”
Almost nothing provides more “sugarplums” than the tax code. The government cannot not pay your mortgage, but it can make the interest you pay a deduction. It cannot pay for everybody’s college, but it can give you a credit for some of the tuition you pay. It cannot force you to find a job, but it can encourage you to work by putting free-money, such as the earned-income tax credit into your pocket, whether you pay taxes or not. Why on earth would politicians, whose only real concern is getting re-elected, ever cede power over the broadest and deepest goodie-bag in the country? They would not and they will not and every politician knows this – but you don’t – and that’s why political hopefuls throw this out there every few years, because the masses think it’s possible. You’ll note that no incumbent has felt it necessary to make the arguments I have to derail a challenger. Promises to abolish the IRS and the income tax are usually made only by fringe candidates with no realistic chance of winning. An incumbent on either side of the aisle will never admit to the things that have been discussed here. It’s simply not talked about in the light of day, at least not to the masses. At most, you may catch glimpses of it in books written by politicos for politicos, such as the Chris Matthews book. It would be very interesting to see such a promise made by a candidate who did have a realistic chance of winning an election. I suspect that you would see some of these arguments presented by the incumbent, only spun in a more favorable light.
The final political reason that the IRS is not going anywhere has to do with demographics. Fifty percent of the population in this country legally pays no tax or pays very little tax. Further, many of the people who pay no tax actually get money returned to them in the form of the earned-income tax credit. What complaints might these people have with the current system? None, I suspect. I imagine they like it very much. I know I would. Since a democracy is based on a majority rule, you would have to convince at least some of these voters to get rid of the IRS and the income tax. Well, good luck with that.
In short, I don’t necessarily love the tax code we have, but, I understand that it has a job to do, the reasons why it is as complicated as it is, and most of all I understand the political reasons of why it’s never going away. So, if you’re one of these folks who spends your life burning up a lot of energy, dreaming of a day without the income tax or IRS, my suggestion is you go find another worthy cause and channel your energy toward something where it might actually have a chance of becoming reality.