The Tea Party Want’s To Eliminate The IRS?
By admin | October 12, 2010
//This is the fifth post in a series on the common lies about the Tea Party Movement, which can be reviewed here.//
The idea that the Tea Party is calling for the elimination of the IRS springs not from any truth that the Tea Party thinks that the government should not have funding to provide the services that it is constitutionally founded to carry out. But, is much more based on the idea that our tax code has become an unwieldy beast that needs to be overhauled.
Many point at the fact that our current income tax system has become a hodgepodge of favors, punishments, and often completely capricious rules that politicians and bureaucrats can use as a carrot or a stick depending on the political mood.
To help alleviate this often ambiguous situation, to main streams of thought have come up within the Tea Party movement as to creating a much more equitable system. To be honest I personally agree with one of these systems, and do not agree with the other, but either of these would add much more predictability to the tax code then currently exists.
Fair Tax
First is what is called the Fair Tax system. This idea would do away with income taxes and would fund the federal government in a manner that is much more inline with how the country funded itself before the income tax was instituted. This system uses a sales tax, the most often cited percentage is 23%. This idea has the benefit of encouraging people to do more of what it takes to create a prosperous society, and less of what destroys prosperity.
This system is based on the idea that if you tax something you get less of it, and if you remove taxes on something you get more of it. So, it encourages people to make more money, save more money, and invest more money, this comes from the fact that since people are not taxed for participating in these activities they will be encouraged to do more of them.
On the other hand, by taxing consumption, the buying of stuff, you will get less of that, thus encouraging people to retain more of their money for things that actually want rather than just spending on momentary whims.
One of the major drawbacks to this system is that fact that it can be regressive in nature, this is because those with lower incomes are forced, out of necessity, to spend a higher percentage of their income on things such as housing, food, and clothing.
To offset the taxing of these necessities some have proposed the idea of a prebate. This would be a check that the government would send to each household, and would be equal to $1,000 per person in each family. I personally find this to be an unwieldy scheme, but it would be better than the ambiguity that exists in the current system.
Obviously for this system to work there would still be an IRS or something similar to it, even if by another name, that would have to audit sales tax receipts and verify the prebates that are going out. Thus the IRS is not eliminated in this system.
Flat Tax
The other system that has gained traction within the Tea Party movement is the idea of a flat tax system. This idea holds that no matter how much anyone makes they should pay a flat percentage of taxes. This has the benefit of not being either a progressive or recessive tax, thus no one group is unfairly punished for their economic circumstances.
It also makes all working people within the society keenly aware of what it is that the government is doing with their money, this because everyone will have a stake in what is happening. This is unlike our situation today where nearly half of the workers in America do not pay income taxes, and simply do not care what the government does to the other half, as long as they themselves are not taxed.
This also removes from the politicians the ability to try and social engineer society, by trying to shape the tax code to reward those they like and punish those they don’t. This returns to our tax code a real idea of fairness, where we all have a stake in what is happening.
This would also allow the preparation of personal income taxes to become much, much simpler, it could literally become a 3 line form:
1. Income for the year:____________
2. Multiply that number by .1 (this is based on a 10% flat income tax)
3. Income Tax To Be Paid:___________
So, for a person that makes only $20,000, the income tax would be $2,000. On the other hand for a person that owns their own business and makes $2,000,000 that year, the income tax would be $200,000. This could also be expanded to businesses based on profit for the year.
The great thing about the system is that a poorer worker would pay less, a more wealthy worker would pay more, and everyone would pay the same percentage. Thus, the ability of our politicians to use the tax code as a way to stoke the the fires of class warfare would be removed from them. This would allow us as a nation to move past this and onto the myriad of other issues that face our nation today.
As with the Fair Tax system, the Flat Tax does not eliminate the IRS, but instead makes it into an organization that instead of interpreting an often vague, and contradictory tax code, becomes an audit agency that makes sure that all tax payers are playing by the very simple rules that are laid out before them.
Of course many will not be happy with a simplified tax code. Many professions have been built on the idea of having a complicated tax system, these would include tax lawyers, CPAs, accountants, and many other tax professionals. But as with any new innovation we have to ask if the benefits of transforming the system outweigh the drawbacks.
Although many were put out of work when our country moved from wagons to cars, did we as a society benefit? If the creative power of the people in the tax professional business, and the amounts of money spent on working through the complicated tax code could be unleashed into new areas, would we as a society benefit? I personally believe the answer is YES on all accounts.
At the very least our country deserves to have a real discussion about these ideas, and that is really what those in the Tea Party are asking for. An informed, measured, factual based discussion on transforming our tax system and creating a system in which we all are encouraged to take an interest in, and all have a stake in, rather than our current system that sets one group against another.
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Topics: Common Lies About The Tea Party, Tea Party Thoughs | 4 Comments »
4 Responses to “The Tea Party Want’s To Eliminate The IRS?”
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I prefer the concept of a flat tax, but it will only marginally reduce the complexity of the tax code. Why? Most (but certainly not all) of the complexities in the tax code have to do with calculating the profit earned by persons in business. For example, it would not do away with the various rules in connection with depreciation — or with “home office” expenses — or with rules in connection with renting a vacation property. Also, it would not do away with the calculations needed to determine the profit on capital goods such as stocks or personal residences — unless you exclude such profits from being taxed.
I think that the credibility and, thus, acceptability of the flat tax is substantially undermined by not addressing such matters. I would hope that some bright person would look into this matter as this discussion continues to evolve.
I do agree that the whole mish-mash of itemized deductions and tax credits for certain types of expenses would make the code far simpler for many people. But this would mean no deductions for high medical expenses or state taxes — deductions that some people will defend with semi-religious fervor.
I applaud your paper for pointing out that a large number of people pay no income tax, and that they do not care how it affects those that do.
Thank you for your comment… I do agree with some of your points, unfortunately I do think there will ever be a tax scheme that everyone would agree with, but I think everyone agrees that our current system doesn’t work the way anyone would want it too. Unfortunately, both sides of the isle think the tax code is broken for different reasons… Many have the misguided belief that those that do pay taxes don’t pay enough, and those that do pay taxes know that the the system is unfair because they are paying for everyone’s taxes…
Came across your post. As a CPA the flat tax would be a huge boon for CPA’s. Our country started out with a flat tax and then they needed all the various rules to ensure that taxpayers were paying some tax. If the rules are not in place we can use the lack of rules to eliminate any taxes. Examples include a person who has $10 million in revenues, who buys a $10 million dollar building. Therefore has $0 income as revenues of $10million – expenses of $10 million = $0. Oops, we need a rule for the purchase of the building. Well they should get to take some deduction for the use of equipment and buildings, etc. So then we create rules for depreciation. The ball just started going down. Obviously, if there is a flat tax it will be hugely regressive to those that make less than $100k or so as the revenues still need to be collected to fund the wars and military, so the question is who is going to pay for the military complex? If it moves away from those making $250k+ that means the tax bill moves to those making less. When 98% of the population makes less than $250k, you will eventually have people wake up and see that the wealthy are getting off of paying their fair share of taxes based on disposable income and vote the legislators out. Then new rules will be developed and more accountants will be needed to work there way around the rules, and more rules will come, etc. until we are back to where we started.
Thank you for your reply Tom.
That is an interesting perspective. Today what we have is a society in which half the populous pays no income taxes at all, and yet constantly demand that others pay their “fair” share. And you are correct that 98% of Americans will not make over $250,000, but how do you use that as a moral argument that 2% of the population should be tax slaves to the other 98% of the populous.
One of the founding notions of our country is that laws should apply equally to all people, so how can we stand by and let our government persecute one section of populous, the most productive section, and simply say that they must pay their “fair” share, when most of us pay little to nothing? Along with that how much is “fair”? A flat tax would eliminate the idea of “fair” for one group over another, and why would we need a deduction for anything?
In the example that you give if I make $10 million dollars I pay a flat tax on that money, if I then pay $10 million for a building, I as the new owner would pay nothing in taxes, on the other hand the person that now has $10 million in new income would have to pay the taxes. So there is no need for any exemption rule, as for depreciation, why should the tax payer pay for that at all? That is a cost of business, not a cost of government… Based on your example we would need exemption rules for everything you would purchase. Along with that the flat tax is not an elimination of rules, it is actually a very simple rule, you pay X percent of your income to tax, no mater how this money is made, i.e. work, interest, realized capital gains, etc.
Thoughts?