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How to Make Taxes Fairer and Abolish the IRS

Prof. Peter Morici - 7/2/2013

Congressional frustration with efforts to get to the bottom of IRS targeting of conservative groups plainly shows the tax agency is dangerous to civil liberties, irrevocably broken and corrupting national politicians. [caisse français étranger bsi] Investigators on Capitol Hill and in the Justice Department may be able to finger a few malefactors but that won’t fix the IRS. The union representing IRS employees is deeply involved in the management of the agency, its leaders have the self-pronounced goal of doing whatever it takes to defeat conservative politicians, it consults regularly with leading Democratic politicians—including President Obama—on electoral strategy, and it has cultivated a culture that encourages employees to exercise discretion in ways harmful to free speech and association.

Simply, the IRS is not a neutral tax-collecting institution but a collection of grass roots activists, enjoying virtually unchecked sovereign power to destroy the personal reputations and finances of those that oppose liberal ideas, and who inflect terror on ordinary Americans through the arbitrary interpretation of tax rules and onerous audits.

Assistant Senate Majority Leader Dick Durbin has openly admitted to asking the IRS to investigate citizens groups embracing conservative views. There is little hope of curbing such behavior or reforming the agency when the Senate takes no action to censure him, and the mainstream media finds nothing much to investigate having learned about this conduct.

The only alternative is to shut the IRS and replace the revenues from corporate and personal income taxes it administers. The latter are riddled with special interest provisions that offer low taxes to the rich and powerful and impose high rates on the rest of us. Moreover, the present quagmire of incentives and disincentives distorts business investment decisions and consumer choices reducing economic growth and leaving all of us less satisfied with our lives. And dealing with the hassle and cost of annual tax returns and the constant fear of IRS audits makes all of us less free.

In 2013, corporate and personal income taxes will yield to the Treasury about $1.5 trillion and could be replaced by an 11 percent sales tax on all private purchases—be they purchases of computer equipment, college tuition or a lunch from the corner takeout.

Businesses and institutions would then pay to Treasury the taxes they collected less sales taxes they paid on purchases of materials and equipment, rent and the like. This subtraction would avoid the double taxation of materials and equipment businesses purchase and create a value added tax so often proposed by advocates of tax reform.

A VAT would favor no activity over another, and by taxing goods and services at the point of sale, it would end the problem of U.S. firms parking profits abroad to avoid taxes.

Businesses and institutions would file a three line return, how much tax they collected, how much they paid and the difference. Individuals would file no tax return at all!

Temptations would abound to exclude or exempt all kinds of activities but that is the kind of thinking that gave us the current mess—and inequities, slow growth and exceeding complex tax returns.

If Congress wants to spend more, it could raise the rate. That would make transparent to all the cost of spending more on government activities. If conservatives on Capitol Hill want to cut programs, they could explain to voters how much those cuts would lower the rate.

Elegant, egalitarian and efficient, such a value-added tax without exemptions would give Americans the tax reforms they want but privileged rich folks and big businesses spend a fortune forestalling.

The economy would grow more and Americans will live better and in less fear. And Mr. Durbin, that is what America is supposed to be all about.

Peter Morici is a professor at the Smith School of Business, University of
Maryland School, and former Chief Economist at the U.S. International Trade
Commission.

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