Imagine an April 15 without the IRS

Federal Reserve Chairman Alan Greenspan testified in early March before the President's Advisory Panel on Federal Tax Reform. The thrust of his remarks was the idea of shifting federal revenue from the income tax to some kind of a tax on consumption. Since a sales tax is certain to face strong opposition from liberals, Greenspan suggested that we compromise by instituting the consumption tax without abolishing the income tax.

There is ample reason to look for alternatives to the income tax. It is inherently unfair, in that those who pay more do not receive proportionately more government services. Taxation of an activity tends to discourage that activity. The income tax thus discourages work and initiative, which are ultimately the main sources of income.

The system is too complex for anyone to truly understand. In an article about the panel at which Greenspan testified, the Associated Press quoted Leonard Burman, co-director of the Urban-Brookings Tax Policy Center. After reading some IRS instructions to the panel, Burman stated: "I have no idea what that means. That's why I use TurboTax."

The worst feature of the income tax is its intrusiveness. It forces every income-producing American citizen and corporation to turn over to the government a complete accounting of intimate financial details every year. Its thousands of pages of regulations heavily influence the policies of every business, and mandate that companies employ armies of very smart people to ensure that they remain in compliance. Surely there is some more significant contribution to our economy that those people could provide if they were not wasted in this way. Further, every investment has to be scrutinized to determine its tax consequences, and many investment decisions are changed drastically based on those consequences.

The personal income tax contributes almost half of all federal revenues. Unless we can bring federal spending down, that means that we would have to come up with about $1.1 trillion this year to replace the income tax revenue. Greenspan mentioned a consumption tax. According to an analysis by the Brookings Institution it would take approximately a 26% national sales tax to replace that revenue.

In constant dollar terms, our 2004 federal spending of $2.3 trillion was over ten times what we spent annually at the height of the Vietnam war (see the historical tables in the proposed 2006 budget). What we decide to spend has an obvious effect on how much we have to collect in taxes. If we could return to a budget of twice what we spent in 1970, we could replace the personal income tax share of spending with a 5% national sales tax!

It is worth remembering that the income tax was instituted in 1913 with the Sixteenth Amendment (income taxes were unconstitutional before enactment of that amendment) and subsequent legislation. Before 1913, federal revenues came primarily from tariffs on imported goods. This led to the happy situation in which Thomas Jefferson could boast, "...it may be the pleasure and pride of an American to ask, 'What farmer, what mechanic, what laborer ever sees a taxgatherer of the United States?"

In the spirit of taxing what we would like to discourage, a return to tariffs would be ideal. A 33% across the board tax on imported goods could replace about half of the revenue from the income tax (minus whatever decrease in imports the tax would cause). It would also make it easier for Americans to compete with the slave labor that is used in communist China and some of our other import "partners."

In order to impose such a tariff, our country would have to withdraw from the World Trade Organization and any other organizations that limit our choices in trade policy. Since our entanglement with these international bodies does nothing but intrude on our sovereignty and send our jobs elsewhere, I say "good riddance."

Even without cutting spending, a 13% sales tax would replace the remainder of the lost revenue. To answer the objection that this would increase the cost of living for low income Americans, the Brookings estimate took into account some kind of relief for that. I’m not sure what kind of relief they had in mind, but if food, fuel and basic clothing were exempt from the tax, it would become a burden only on the purchase of relative luxuries.

Imagine an April 15 without the IRS breathing down your neck.