Now It’s Really Time For A Flat Tax

If the scandal over monitoring political groups that forced the acting commissioner of the IRS to resign this week doesn’t inspire dismantling the tax-collecting agency and introducing a flat tax, nothing will. It won’t happen, of course. But it should. There are easier, more efficient ways to collect taxes than allowing bloated bureaucracies to act with near impunity as a quasi-government within a government. If that’s not painfully clear at this stage, if it’s not obvious that the IRS is too big, too powerful, and oversees an impossibly convoluted set of tax laws, it’s hard to imagine that we’ll ever engage in meaningful reform of the US tax system, which is in dire need of reforming.

Instead, the only consolation is a symbolic resignation from the head of the IRS and a lengthy report (pdf) from the Treasury Inspector General for Tax Administration that refers to “inappropriate criteria” for the agency’s targeting of conservative groups. Perhaps a few people may go to jail when the dust clears. And we’ll have Congressional hearings too. But the IRS will survive, on that point you can be sure.
And therein lies the problem. The Byzantine empire that the IRS oversees is a net drag on the US economy. The fact that we, as a country, move heaven and earth to collect 15%-20% of GDP as taxes through time by way of 72,000 pages of tax code is, well, ludicrous. Some form of the flat tax would do the same thing without the brain damage. Indeed, the current system incurs enormous costs in time and money, as anyone with a fairly complicated tax situation will tell you. Actually, it’s the height of arrogance on the government’s part that it imposes a tax system on its citizens that they have little hope of understanding or even complying with.
As one quick example: What’s the rule on wash sales when it comes to swapping one broad US equity ETF for another–an S&P 500 fund for a Russell 3000 fund, for instance? The advice varies, depending on who you talk to. This type of trade runs afoul of the wash sale rule, some CPAs tell me. Others say it’s fine. This debate has been going on for a number of years, but the IRS has yet to clarify.
The bottom line: there is no rationale for the incredibly complex and often ambiguous rules that govern our tax system. Beyond the obvious economic inefficiencies this insanity imposes, it also fuels a giant bureaucracy that wields enormous power that apparently extends to political affairs. To what end? To collect a relatively stable share of revenues as a percentage of the economy? That’s like calling out the Marines to issue traffic tickets.
The real IRS scandal is that this agency has grown to proportions that were never intended. Absolute power corrupts absolutely, Lord Acton warned. The only question is whether we, as a nation, will fix what’s in desperate need of fixing? Don’t hold your breath.
Why doesn’t Congress want to reform the tax system? A recent essay by a pair of professors have a reasonable if cynical answer:

The more complex the tax code is, the more politicians can use budget gimmicks to hide the benefits they give to their cronies and traditional voting blocs as they position themselves for the next election. At the heart lies the politician’s election-year mantra: I’ll hand out more governmental largesse and lower your taxes. Only we can’t have it all.