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March 6, 2013

How About a Real World Tax Code?

 

One of the virtues of limited government is that people are freer because they don’t live under constant fear of an oppressive, capricious and arbitrary government.

Conversely, as laws and regulations multiply, government’s power necessarily increases because it takes more to police and enforce all those laws and regulations. It becomes a kind of arms race—the volume of law and regulation increases, and to cope with it comes a corresponding increase in government’s enforcement powers. As a result, there is an increased chance that a well-meaning citizen will accidentally or wrongly become ensnared in the government enforcement mechanism.

This is why the Founders put limitations on government in the Constitution—to protect citizens from an oppressive, aggressive or even mistaken government. Law-abiding citizens should not have to live in fear of their government.

But we live in fear of the IRS, and not just those who attempt to evade taxes. We live in fear of making even a tiny mistake, or encountering a particularly aggressive IRS examiner, and then hearing from the IRS years later, with compounding taxes, fees and threats. Our fear is driven by the absurd complexity of the tax code, and by the knowledge that there is a very good chance that if 10 professional tax preparers worked on our taxes, they would arrive at 10 different tax liabilities.

The IRS doesn’t like the current system either, but it’s not the complexity they don’t like; it’s the fact that our voluntary system of tax compliance puts them in a position of “look back” enforcement—analyzing selected returns after the fact, and only then making enforcement inquiries of the tax filer. What the IRS wants is a “Real Time Tax System” (RTTS), which means examiners would have access to all of a taxpayer’s tax-related information before the taxpayer even files—and they could reject an electronic tax filing if the numbers disagree with theirs. Think they ever would?

The threat of the Real Time Tax System to financial privacy is that it gives the IRS cover to amass a limitless database of financial information on American citizens. But it’s also sadly amusing, because a massive new IT system would be necessary to implement the RTTS, and the IRS has been an unmitigated disaster when it comes to trying to implement new IT systems, having spent billions on systems that have had massive cost overruns and repeatedly failed.

Instead of allowing the IRS to waste billions and become even more oppressive through the Real Time Tax System, Congress should design a Real World Tax Code, which would make both the IRS’s and the taxpayers’ jobs easier.


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