Posted 03.04.2010
The impending implosion of the income tax system
Taxation-wise, we're still stuck in prehistoric times
By Thomas FreyIn the movie The Day After Tomorrow, survivors stranded in a library are easily persuaded to burn the multi-volume IRS Tax Code to stay warm. In this fictional scenario, the question one might ask before securing a match: Why did we wait until the end of the world?
In 2003, I wrote a paper titled "The Coming Collapse of Income Tax" in which I predicted that our current income tax system would collapse within 10 years. My prediction stands, even as the clock is running out of time. I am still firmly convinced the collapse is near.
Tax expert Calvin Johnson testified before the U.S. Government Affairs Committee in 2003 taking to task the relationships of public accountants and the tax shelter industry. Johnson, a law professor at the University of Texas at Austin told the Senate panel that writing "tax shelters has done real damage to the tax system and allowed many taxpayers who should pay income taxes of 35 percent to pay 10 percent." The tax base has eroded as a consequence, he noted.
The tax system is yet another system that has been so bastardized from original form, it bears no resemblance to a system at all. It is a jumble of instructions, a wilderness of tangled vines only the bravest of us would dare venture into without software or a battery of lawyers and accountants.
What's more, the tax system is drastically out of step with the rest of the world. As business continues to shift from national to global in scope, the observable trend toward an ever more complicated taxing formula is doomed. The government's round-the-calendar attempts to bring ever greater precision to extracting the perfect, yet optimal amount of taxes from every individual to achieve some vague notion of fairness, flies in the face of logic and world trends.
If taxes were paid through an automated system built around seamless and invisible processes, the system might have a chance to survive. However, the current adversarial model, which is based on minutely detailed tax codes backed up with forced compliance, is a system that can't last. Small businesses, in particular, await this day.
A View from the Future
People in the future will look back at this era and use our tax code as an example of the ultimate stupid system.
The IRS Tax Code ultimately will take its place alongside phrenology and alchemy in insipid history. Most embarrassing for the several generations that have endured the growing encyclopedia of code is taxpayers ultimately pick up the cost of the multi-billion industry devoted to divining its meaning. We had not come far, historians will say. Before the invention of the wheel, cavemen carried everything on their backs. So do we.
The all-consuming nature of tax preparation has been grinding the gears of the economy for decades. It is a major obstacle, stifling business and commerce and sucking talent and intellectual bandwidth into an irretrievable bureaucratic black hole.
Few believe - horror of horrors - if their most recent tax filing were put to severe scrutiny that they would emerge unscathed. And therein lies the problem. Income tax has become an adversarial relationship between government and taxpayer. Taxpayers are constantly running for cover from the latest barrage of mortar shells containing a labyrinthine complexity written in unforgivably obtuse bureaucratese.
A tax system Armageddon is near.
The inevitability of system failure does not portend the end of taxes, though. Government will need money to operate. Our ability to function within a monetized society is dependent upon some system for generating money for the government's coffers.
I am not predicting which new kind of tax will emerge from this, only that it will happen.
As complexity increases, the cost of managing the complexity increases at an exponential rate until the system finally collapses.
Readers Respond
Thank you, Mr. Frey. Your predictions give me great hope. I have believed for a long time that a national sales tax is the answer. Under this system, we pay when we consume. There is no valid argument about hurting the poor. Systems already are in place to collect and pay taxes at the point of sale, and to exempt people who cannot afford to pay. This system would collect taxes from everyone - people who deal in cash (read: drug dealers), as well as those of us who receive paychecks. As a business owner, REAL health care reform and tax equity are two of my most important issues. I realize, however, that this means a lot of IRS employees and accountants would need to find other work!
By Sandra on 2010 03 16The tax system in Colorado has imploded. Phone wait times exceed one hour at the Department of Revenue. The message at the beginning, "due to budget cuts." Nice, all I was trying to do was pay you some money but it took two calls with over one hour wait times to get clarification. I guess until the knuckleheads in government figure out it's easlier to collect a flat sales tax instead of making almost five million people file a report, the tax collection system in the US will implode.
By Tom on 2010 03 12How about this for a trigger - enough people get informed that the USSC has refused to investigate whether or not the 16th Amendment was ever actually ratified, instead saying that this was a political question. Or enough people find that if they ask the IRS about the interpretation of several sections of the tax code, they will be met with no answers, but rather an admonishment that the IRS is large and powerful, and would sooner hurt you than answer the questions.
By Nunya Bidnez on 2010 03 07The points about how much mental and physical record keeping waste there is are quite valid. I have sent my own tax accountant scurrying off several times recently to figure out what ought to be questions asked thousands of times over. And found that what was a guideline a few years ago is now changed today for no apparent reason. How do you keep up? There is an additional problem. We all "know" that the current system is not fair to us. Tax shelters, tax credits, under the table income, special considerations for railroad workers or beet growers or whatever leave the rest of us to ask "where is my special exemption?" So we work to pay taxes, decide whether to use conservative or aggressive interpretations of the gray areas, worry that if the IRS shows up we are screwed if we were too liberal and that if they don't we paid too much if we went conservative and "know" that the next guy over probably got a better deal out of this mucked up system. I don't want to gamble on interpretations, I don't want to spend my clever time trying to figure out how to work the tax system when it should be spent benefiting society and at the risk of ending on a political note how could I feel good about politicians designing any new bureaucratic system when they have done such a horrible job of keeping this one clean, fair and efficient?
By Burt on 2010 03 04Leave a comment
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