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HOW A NATION BORN OUT OF A TAX REVOLT has—and especially hasn’t—solved the problems of taxing its citizens
May/June 1996 | Volume 47, Issue 3
Today the American goose flock, 260 million strong, is hissing furiously over the nation’s federal tax system, and it is not hard to see why. The United States Internal Revenue Code takes up six inches of shelf space in two fat volumes. But that is not the half of it. Federal tax regulations, the Talmud, if you will, to the Torah of the tax code, takes up an additional foot of shelf space in eight volumes. Thousands of accountants and lawyers devote entire careers just to small portions of this behemoth, and no one could possibly know its entirety, not even the Internal Revenue Service. Indeed, it is estimated that one-third of the inquiries made to the IRS’s own 800 help line are answered incorrectly.
Every year the IRS sends out more than eight billion pages of forms and instructions (requiring, at least according to one authority, 293,760 trees to make the paper). Even modest incomes can require an astonishing number of pages of tax forms to report. My own—believe me, modest—income needed sixteen pages for the federal return for 1994, another seven for the state. A friend who comes from a wealthy family and has his own considerable business had a personal return this year that ran to more than four hundred pages.
Meanwhile, corporations have it far worse. Chrysler’s 1991 return, for instance, was a stack of paper six feet high, prepared by fifty-five accountants who worked on nothing else that year. The company is perpetually audited by at least nine IRS agents. Chrysler’s chief tax counsel estimates that it will be ten years before all current matters in dispute between Chrysler and the Internal Revenue Service are settled. And they will be settled, essentially, by negotiation. There simply are no cut-and-dried, right-orwrong answers to the thousands of questions that are raised in a return that has tens of thousands of calculations that are required by a law that has hundreds of thousands of provisions, exemptions, provisos, interpretations, and internal contradictions.
FOR MOST OF OUR history—from 1789 until World War I—import duties usually provided most federal revenues.
The cost of all this is staggering. Although the IRS spends only about seventy cents for each hundred dollars it collects in taxes, the burden lies principally on tax filers and their employers, who act as unpaid tax gatherers in addition to having to file their own returns. A 1985 IRS-commissioned study estimated that individuals and businesses needed 5.4 billion man-hours to complete and file returns. Had these man-hours been fully compensated, they would have cost $159 billion, or 24.4 percent of the income tax revenues received by the government that year.
To put it all another way, the means by which the federal government raises revenue violates every single principle of sound taxation developed over the more than five thousand years in which taxes have been collected. These principles are no great mystery. Adam Smith listed four of them in the Wealth of Nations more than two hundred years ago. “I. The subjects of every state ought to contribute towards the support of the government . . . in proportion to the revenue which they respectively enjoy under the protection of the state. . . . II. The tax which each individual is bound to pay ought to be certain, and not arbitrary. . . . III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. . . . IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state.” Today, in a heavily taxed, highly industrialized, completely integrated cash economy that Smith never imagined, we might add another: “V. Taxes should distort as little as possible the underlying economy that generates the wealth to pay them.”