APRIL 1995 - FISCAL FITNESS
by Ron Ross
Here's an easy question: What's the most hated institution in the country? The answer, of course, is the Internal Revenue Service - especially this time of the year. You probably think that the IRS is simply something we have to live with, that it's an unpleasant but necessary reality of modern living.
It could be, however, that ridding ourselves of the IRS is within the realm of feasibility. It is, in fact, a possibility that is being seriously examined not just among theoreticians but among persons in positions of authority as well.
The new chairman of the House Ways and Means Committee, the traditional source of tax legislation, is Bill Archer. In a recent interview with Businessweek magazine, Archer said, "I want to tear the income tax out by its roots ... (and) eliminate the IRS from our lives."
Without taxing income, where would the federal government derive its revenue? The most realistic and likely alternative is a national sales tax or a "value-added tax." We could tax consumption rather than income.
Replacing the revenue now collected from federal individual and corporate income taxes would require a sales tax rate of approximately 14 percent (applied to all final purchases of goods and services).
Ceasing income taxation would greatly reduce the government's intrusiveness into our lives. The reduction in the record-keeping burden alone would make a dramatic difference. Just imagine not having to keep and sort out all those records and documents every year as you prepare your tax return. That, however, is only the tip of the iceberg.
A vital difference between an income and a sales tax is this: An income tax is on people (and businesses) and a sales tax is on transactions. By its nature, an income tax necessitates the detailed monitoring of the lives of people. Nothing does as much violence to our privacy as the collection of income taxes. We've gotten used to it, but we would be much happier without it.
Ending income taxation would do wonders for the economy. The annual corporate income tax return for the Chrysler Corp., for example, is three feet high. Chrysler employs 65 people full-time to prepare its taxes. The expenditure of resources in preparing such documents increases the costs of products. It's estimated that it costs the economy as much as 60 cents to collect a dollar's worth of income tax revenue. Using income as the tax base is horrendously inefficient.
The tediously complex tax code also causes immeasurable distortions in the economy. Many individual and business decisions are based not on true costs and benefits, but rather on the artificial prize of tax avoidance.
The complexity of the tax code is a problem in itself. We expend vast amounts of time and talent struggling to cope with its labyrinthine provisions. Fair and effective enforcement is far beyond the IRS' capabilities.
We've attempted numerous times to simplify the tax code and it only grows more complex. It's time we recognized that a simple income tax is an oxymoron.
The absence of income taxes would increase the net reward of earning income from employment and investments. A sales tax would discourage consumption, and, by definition, income not consumed is saved.
We would solve the problem of our anemic savings rate. Savings provide the basis for investment, and the more we invest the faster we grow. Increased economic growth is one of the greatest gifts we could leave our grandchildren.
One drawback of converting to a sales-tax based system is that sales taxes are, to some extent "regressive." In other words, the percent you pay decreases as your income increases. I'm convinced, however, that the lower prices resulting from economic efficiencies and greater economic growth would result in low income people being markedly better off, on balance, than they are currently.
What would happen to the millions of people employed in tax return preparation and all the supporting activities? The money not spent on tax preparation would be spent or invested in something. Jobs would arise.
Tax preparers are typically bright, creative and well educated. They will find employment producing goods and services. The fact that millions are employed in helping the IRS collect revenue is another indication of its burden on the economy.
Individuals and businesses are draftees in the IRS revenue collection army. Ending the draft would generate more benefits than we could possibly imagine. You're going to hear a lot more about this proposal as more people realize that the IRS is something we can live without. -end-
A former professor of economics, Ron Ross is a financial planner with Premier Financial Group, Eureka.
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