Eliminating the IRS

I’ve thought about this topic quite a bit over the past few months.  I have yet to read the book titled “The Fair Tax”, but it’s on my list of books to read soon (sitting in my pile).  I suspect that I will modify this page over time as I read more, read your comments and seek other opinions.

Many politicians in the conservative camp have made a lot of hay with the idea of eliminating the IRS.  Fred Thompson, whom I support at the time of this writing, has this as his Tax Reform position:

The U.S. tax code is broken and a burden on U.S. taxpayers and businesses, large and small. Today’s tax code is particularly hostile to savings and investment, and it shows. To make matters worse, its complexity is a drag on our productivity and economic growth. Moreover, taxpayers spend billions of dollars and untold hours each year filling out complicated tax returns, just so they can send more money to Washington, much of it for wasteful programs and the pet projects of special interests. We need lower taxes, and we need to let taxpayers keep more of their hard-earned dollars—they know best where and how to spend them. And we need to make the system simpler and fairer for all. To ensure America’s long term prosperity and economic security, I am committed to:

  • Fundamental tax reform built on the principles of simplicity, fairness, and growth.
  • A new tax code that gets the government out of our citizens’ pocketbooks, while enhancing U.S. competitiveness abroad.
  • Dissolution of the IRS as we know it.

This point needs very careful consideration. Most of the Republican candidates have made some kind of statement to the effect of reducing the tax burden, tinkering with how the IRS works, or removing it altogether.  I consider this to be a POPULIST statement. That doesn’t necessarily make it a bad idea, but the way it is propped up, people are expecting and looking forward to discontinuing the state and federal income tax assessments on their paychecks beginning Jan 1, 2009.  Even if a more realistic (at least with respect to how quickly a reactionary process could complete it) Jan 1 2010 or 2011 were possible, it would be a very risky agenda.

Don’t get me wrong, I’m in favor of a some other approach to taxation… consumption-based taxes work okay, or property taxes are another, and less regressive than a sales tax. However, it isn’t going to work with a snap of the fingers and *poof* it’s all better.  A dramatic change like this has to be done with care, in a phased approach, and likely with more complexities than we currently have during the transition period, because almost all financial strategies for corporations, individuals planning retirement, insurance programs, investment programs, etc, are tied to the current tax structure. This is not insurmountable, but it is not an easy fix. Again, a national sales tax can be regressive if not done right.

The other consideration is the fact that most states use a revenue model that is based on the federal model.  Just because the federal model changes doesn’t mean that state models must change.  On top of that, many state models (Iowa, where I live, included) are dependent on the federal model and will also be dramatically impacted if the federal model is removed.

I don’t want to dissuade us from doing the right thing here, and eventually eliminating the IRS may be that good thing.  Let’s just make sure we catch our collective breath and work through this thoughtfully before we make a mess of everything, and ESPECIALLY before we start pointing fingers at people who get elected with this issue on their agenda and say they failed to deliver.  It may take a decade or more to make this this idea a reality even once a solution is agreed to.  And we all know how hard it is to get Congress to agree to anything.