Apart from criminal prosecution, the best way to strip the power of politics and corruption from the IRS is to initiate broad-based, pro-growth tax reform and simplification. It’s the complexity of the tax code that nurtures the corruptness of the IRS.
There’s a buzz in Washington about this possibility, where both Democrats and Republicans are interested in reform. We need a simpler and flatter tax code. We need to get rid of the crony-capitalist insider deductions and exemptions, which have given the IRS so much power. These deductions and exemptions are precisely what nurtured the political corruption that led to a major scandal.
Some conservatives — like my great pal Jim Pethokoukis — don’t believe tax reform can be done. Old habits die hard, he believes. And the budget numbers from a pure flat tax never add up.
Well, Pethokoukis may be right in his concerns. But that’s no reason to give up the fight.
I’m going to argue for a modified flat tax in the personal code, and a single-rate flat tax — or a sales tax net of investment — for large and small businesses. Here’s a quick example of the need for this reform.
The Wall Street Journal editorial page just ran a tax-exempt IRS primer surrounding the 501(c), which unbelievably covers 28 categories of organizations. The 501(c)(3)’s include charities, the (c)(4)’s cover social-welfare groups, the (c)(5)’s cover labor unions, and the (c)(6)’s include business groups.
That’s a gigantic mess. And I say scrap the whole thing — take the IRS’s power away.
If people want to give to political campaigns, fine. Give as much as you want to whomever. But post it on the Internet for all to see right away. No secret donors. No tax deductions. And no IRS interpretations.
I don’t know how many other examples of tax-exempt craziness there are in the IRS code. The Journal itself says, “The tax code would be cleaner, and our politics fairer, if no one enjoyed any tax-exempt advantages.” Right on. That’s where the simplicity comes from.
And then let’s put a limit on numerous other tax deductions. Trillions of revenue dollars are lost from mortgages, charitable contributions, health care, and state and local spending deductions. We don’t need them.
But to make the tax-reform transition easier, and promote economic growth, let’s go the way of Reagan in 1986 and slam down the marginal tax rates.
For example, we have six brackets today: 10, 15, 25, 28, 33, and 40 percent. How about two brackets? One at 10 percent would have a high income threshold, and one at 28 percent would take over from there.
And you know what happens because of these lower tax rates? The remaining deductions become far less valuable, even unnecessary. And the low tax rates spur economic growth by providing new incentives to work, save, and invest. Housing and charitable deductions went through the roof during the prosperous years that followed the 1986 reform.