Tax Man LLC

The Client Letter That Never Dies!
(Originally written in 1998)
Abolish the IRS?  Don’t Hold Your Breath!

   With all the recent ballyhoo about IRS abuses of taxpayers as well as their own employees and the recent proposals before Congress, it seems that some people are again jumping on an “Abolish the IRS” bandwagon.  For years various politicians have even put their signatures on a petition to seek this abolition within 3 or 4 years (even though no one has proposed an alternative means of collecting taxes with any substance).

  People have proposed many different alternative type systems such as a national sales tax, value added tax, and flat tax as well as elimination of all preferential deductions and tax treatments of certain income.

   Let me give you a few real reasons why I don’t think the abolition of the IRS is likely in the very near future, if ever.

1.  The national sales tax type of concept won’t be well liked by most taxpayers.  Why not?  I can think of a couple of reasons:
   First, in order for the federal government to raise the necessary revenue, the sales tax rate is projected to be 17-21% over and above the existing sales tax for each state.  For Nevadans this would be around 25-29%.  I don’t think so!
   Secondly, if this national sales tax is applied like other state sales taxes and applies primarily or only to consumer goods (with savings and investments exempt) then you will find a disproportionate burden on people who spend all or a substantial portion of their income, a/k/a the poor people and middle class.  On the other hand, people who spend very little of their income and invest the bulk of it, a/k/a the upper middle class and rich, will love this format.

2.  The concept of a value added tax is really pretty much what we have now.  Any business or person who adds value to a transaction (labor, wages, or profit) pays tax on this.  The costs incurred in the production of the transaction are normally deductible (business expenses and costs of goods and materials in production).

3.  The concept of a flat tax sounds wonderful until you apply it to yourself.  No deductions, but everyone pays the same rate.  Sounds fair.
“But wait a minute, what do you mean I don’t get credit for my kids, or get to deduct home mortgage interest, property taxes, and charitable contributions?  No child credits or personal exemption?  Hey, that’s not fair (to me)!”
  As soon as Congress gets enough complaints about the loss of deductions and starts selectively allowing them back into the tax computation, we will have the same type of convoluted system we now have.  There is a marvelous quote from former Treasury Secretary William Simon that seems to fit here:
“The nation should have a tax system that looks like someone designed it on purpose.”

4.  Charitable and religious organizations would be financially devastated by eliminating contributions to their organization from the list of deductions.  While one would ideally think that charitable giving is truly from the heart, there is no doubt that it is significantly more “heartfelt” when the government chips in 15-40% of “my” gift.

5.  Congress can’t give up the power that the tax structure gives them.  This is the major reason in my opinion.  Virtually no other tool gives the Congress as much, nor as much immediate power, as the tax structure.  In that sense the tax code is a very effective political and economic tool (although it is not necessarily used wisely or fairly).  What I mean by immediate power is that people react to changes in tax law immediately, sometimes before the laws are even finalized.  The Tax Reform Act of 1986 was a marvelous example of people over-pre-reacting (I know it’s not a word).

   Virtually all other government programs have time lags.  There is a time lag to even determine that a need exists.  There is a time lag to determine what might be done.  There is a time lag to pass a law enacting a program.  There is a time lag to create and implement the program.  There is a time lag for the impact of the program.  And there is a time lag to measure the results of the program.  This can easily be many years later for the full cycle to run its course.
   The tax system is far more immediate and, indeed, can be retroactive such as the regular extension of various tax incentives that backdate to the beginning of the tax year.  Is there anybody out there who really thinks that Congress would create a tax structure that takes one of its most powerful tools away from itself?  C’mon really?!

  In my opinion this is nothing more than political rhetoric and will likely pass after next November elections.  Oh, it’ll come back for the year 2000 elections and again in 2002 and again in 2004 and again in 2020 . . . Well you get the idea, I'm sure.

Randall S. van Reken, EA, CFP, ATP