As Thomas Paine once wrote, “These are the times that try men’s souls.” It’s tax time. By April 15, millions of Americans will have struggled with a tax code that is overly complex, coercive, distorts the allocation of resources, and takes too much of our income.
Form 1040 is two pages, yet its instruction booklet runs to more than 100 pages. If you ask for all the forms and publications, the IRS website will produce 1,994 files. Because the Internal Revenue Code is so complex, nearly all citizens can find themselves running afoul of the law. This gives the federal government substantial coercive power over the American citizenry.
A quote of James Madison’s from Federalist 62 is appropriate here:
It will be of little avail to the people that laws are made by men of their own choice if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; or if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man who knows what the law is today, can guess what it will be like tomorrow.
Is this not a description of the Internal Revenue Code? The National Taxpayer Advocate, established within the IRS to provide reports to Congress on the tax code, found that 60 percent of taxpayers hired someone to fill out their tax forms, and 30 percent used some form of software to assist them. We spend the equivalent of three million people working full time to comply with the tax code. The code has had 5,000 changes since 2001.
A great deal of the complexity of the code is a result of Congress using it to force us to act in ways that we would otherwise not want to. If Congress provides a credit to buy a particular good, such as an electric car, it indicates that we would not have bought that car without that incentive. This means that the value to the buyer of the good is less than what it costs to produce. Tax credits not only get us to do things the central planner wants, but they result in the inefficient use of resources.
A tax code that is ever-changing creates uncertainty for entrepreneurs. This, in turn, reduces economic growth. For example, if you are about to spend $150 million building a factory, you will have to capture revenues over a lengthy period of time. If the government can impose a massive tax on the income from that factory two years after you build it, then you probably won’t build it.
The 19th-century French political economist Frederic Bastiat pointed out that government can engage in “legalized plunder,” as he called it. When a government can take from some and give to others (or give one producer an advantage over another), he argued, then “the plundered classes” will attempt to make the law.
Bastiat said that when I can give tax credits to people who buy my product both of us will now have an incentive to get the tax code amended in our favor. This is one reason for the 5,000 changes in the code since 2001. Everyone loves to hate lobbyists, but they are, like every other market participant, simply responding to the incentives created by our government.
We should heed the words of Madison and begin to increase our liberty and improve the economy by simplifying the tax code. In 1993, Robert Hall and Alvin Rabushka published a book calling for a flat, low-rate income tax. Today, H.R. 1040, a bill currently under consideration in Congress, would move us towards such a flat tax. This would let us act in the way we desire rather than the way those in charge of the government desire, and improve the standard of living and the range of opportunity for all, but particularly for the middle class and the poor.
The Warren Buffetts of the world use tax attorneys to mitigate the cost to them of the tax code and have a lifestyle that, while not as opulent as it would be, certainly is sufficient for their desires. Meanwhile, the middle class bears much of the tax burden, and the poor suffer from the economic inefficiencies caused by the code.
Tax Day reminds us all how broken the current system is. The time for reform is now.
Dr. Gary Wolfram is the William Simon professor of economics and public policy at Hillsdale College in Hillsdale, Mich.