Abolishing the IRS
Possibility or pipe dream?
By Laurence M. Vance

It’s tax time again, but many Americans will have to work beyond April 15 just to make enough to cover their tax burden for the year. Tax Freedom Day—the day calculated by the Tax Foundation on which Americans have theoretically earned enough to pay all of their taxes for the year—has not come before April 15 since 1967. The dreaded day has even twice occurred in May.

Although Americans are burdened with numerous local, state and federal taxes, the federal income tax is the tax that generally infuriates Americans the most. Although Americans who are familiar with the welfare states of Europe might be tempted to think that taxes in America are low compared to the world in general, this is actually not the case. The United States ranks high in personal income taxes, and even higher in corporate income taxes. According to the Heritage Foundation’s 2008 Index of Economic Freedom—an index where personal and corporate tax rates, along with other economic measures, are compared across the globe—the United States ranks 87th out of 156 countries when it comes to personal income tax rates and 125th out of 156 when it comes to corporate rates. This means there are more countries that have income tax rates lower than the United States than countries that have higher rates.

The roots of the income tax in the United States go back to the Civil War, when Congress passed a 3 percent tax on incomes over $600 and a 5 percent tax on incomes over $10,000. This tax was abolished in 1872 but, after several failed attempts, was reinstated by Congress in 1893. This tax was soon judged to be unconstitutional because the Supreme Court ruled that the tax was not apportioned according to the population of the states as required by the Constitution.

Our current income tax system, made possible by the adoption of the 16th Amendment, began with a 1 percent tax on taxable income above $3,000. Surcharges of up to 6 percent were applied to higher incomes. From these humble beginnings, the income tax soon became, thanks to World War I, an oppressive tax with a maximum rate of 77 percent. In the middle of the Great Depression, the top rate rose to 79 percent; it rose to an astounding 94 percent during World War II. These high rates were the norm until after the mid-1960s. The top bracket today is 35 percent.

As the collector of the income tax, the agency of the federal government that Americans loathe perhaps more than any other is the Internal Revenue Service (IRS). There are no letters more dreaded than those from the IRS. Of the numerous tax reform plans proposed over the past few years—the Flat Tax, the FairTax, the Efficient Taxation of Income Tax, the Business Transfer Tax, and the two plans recommended by the President’s Advisory Panel on Federal Tax Reform: the Simplified Income Tax and the Growth and Investment Tax—only the FairTax actually proposes to abolish the IRS. Unfortunately, this doesn’t mean that the FairTax is the ideal tax reform plan, or that it would actually abolish the IRS.

The FairTax is a progressive, revenue-neutral national sales tax. It would replace not only personal and corporate income taxes, but also estate tax, gift tax, capital gains tax, unemployment tax, alternative minimum tax, Social Security tax and Medicare tax. All tax deductions would likewise be eliminated. The FairTax would not, however, eliminate any state or local taxes, or federal taxes like tariffs, excise taxes on things like gasoline, tobacco and alcohol, or the special taxes on airline tickets. The FairTax would apply to all services (from operations and funerals to rent and haircuts) and the final sale of all new goods (from cars and houses to prescription drugs and food).

Along with its numerous other problems, the FairTax merely exchanges one tax for another. And because it is revenue neutral, the federal government wins hands down: Americans feel better about paying their “fair share” of taxes and Congress gets to continue its profligate spending. This means that every federal agency, every federal program, every pound of federal pork, will be funded exactly as it is now.

Proponents of the FairTax, like Atlanta talk show host Neal Boortz, talk about how it would eliminate the IRS, but it would do nothing of the kind. It would merely change its name and function. Although a national sales tax would be collected by the states from retailers, it would still be a national sales tax, and as such, would have to be overseen by some agency of the federal government.

The FairTax bill in Congress, which has been introduced in the House of Representatives at the beginning of each new Congress since 2001 by Georgia congressman John Linder (R), plainly says that there will be created an “Excise Tax Bureau” in the Department of the Treasury to administer excise taxes not administered by the BATF. In addition, a “Sales Tax Bureau” would also be created to administer the national sales tax implemented by the FairTax, and this bureau would house the “Office of Revenue Allocation.” The FairTax would also set up a “Problem Resolution Office” and authorize “problem resolution officers.” In short, the Boortz and Linder way of abolishing the IRS would abolish the IRS the same way it would abolish the income tax—by replacing it with something else. The only possibility of really getting rid of the IRS is by abolishing the income tax and replacing it with nothing. This, however, can only be done by drastically cutting congressional spending.

Individual income taxes could painlessly be eliminated if federal spending was simply reduced to about the level it was at the beginning of the Clinton administration. This is a simple solution that would still leave the federal government with revenue from corporate income taxes, social insurance taxes, excise taxes, estate and gift taxes, customs duties, and miscellaneous receipts. With no income tax, there would be no capital gains tax, no withholding tax, and no refundable tax credit income transfer programs—all without a national sales tax.

And that is no pipe dream.

Laurence M. Vance holds degrees in both accounting and economics. He is an adjunct scholar of the Ludwig von Mises Institute in Auburn, Ala., for which he has written numerous articles on taxation, including a critical review of The FairTax Book by Neal Boortz and Georgia Congressman John Linder.

 

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