Could we really just “get rid” of the IRS?
Probably not, most experts say, because no one has figured out how to make sure the government gets the money it needs unless somebody collects it.
Examination of several alternatives to the income tax show why getting rid of the tax man wouldn’t be easy:
Federal sales tax: If the government scrapped the income tax for a full-fledged sales tax, there would be no need for individual tax returns, in theory. The burden of compliance would shift entirely to retailers, who would have to verify that they had paid Uncle Sam the required percentage of their sales.
But most economists think the rate for a federal sales tax would have to be at least 20 percent and perhaps more than 30 percent to bring in enough revenue to fund the government at current spending levels. And piling a federal sales tax on top of the sales taxes most states levy could push the combined rate over 40 percent.
Sales-tax compliance problems are “difficult and contentious when the rate is 5 percent; they would be gravely serious at 25 percent,” University of Michigan economist Joel Slemrod writes.
There also is a social-justice question. The burden of a pure sales tax replacing an income tax would fall more heavily on low and middle-income families who have less discretion than the wealthy about whether to spend or save. Efforts to remedy that through grants or exemptions for the less affluent would require complex regulations and enforcement. The government could grant tax breaks for basics such as food, clothing or gasoline, but that approach also would add complexity.
Value-added tax: Under a VAT, revenue is collected at each stage of production rather than only at the retail counter. Firms are taxed on the difference between their sales receipts and what they paid for the machines and non-labor materials they used to make their products. A VAT would allow firms to complete their tax returns using information they collect routinely, and many experts say it would have fewer compliance problems than a sales tax. Experience in Europe, where a VAT is widely used, suggests it is not a panacea. Exemptions and multiple rates that demand elaborate enforcement have crept into European tax codes, almost all of which rely on some combination of a VAT and an income tax to bring in revenue. Slemrod says that the failure of European VATs to achieve major simplification “suggests one should not compare the messy real world income tax with an ideal VAT that, at least so far, exists only in the imagination.”
The flat tax: Under a flat-rate income tax such as the one advocated by House Majority Leader Richard K. Armey, R-Texas, individuals with incomes above a certain threshold, along with firms, would file simple returns annually. Taxpayers could add up income from wages, pensions and fringe benefits, subtract a standard deduction and divide by a fixed rate. Investment income - from interest, dividends, rent or royalties - would be excluded from personal taxes. Businesses would calculate their liabilities much as they would under a VAT, except that they would deduct their labor costs.
The IRS couldn’t be abolished, but its workload - particularly in monitoring compliance by individuals - would be much lighter.
Improve the existing system: Defenders of the income tax argue that it could be simplified dramatically with a few simple changes. Doubling the standard deduction - now $6,550 for married couples and $3,900 for singles-would radically reduce the need for record keeping by most filers. Closing loopholes also would permit a reduction in rates. The Clinton administration favors modest simplification, such as fewer reporting requirements on estate and property taxes for small businesses and increases in the value of travel and entertainment expenditures for which taxpayers must keep receipts.
“There’s no such thing as a selfenforcing tax system,” says conservative economist David Bradford of Princeton University. “You’ve got to have a tax collector.”