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Archive for September 19th, 2012

I’ve done thorough blog posts highlighting the economic benefits of the flat tax, but I find that most people are passionate about tax reform because they view the current system as being unfair and corrupt.

They also don’t like the IRS, in part because it has so much arbitrary power to ruin lives.

But it’s not just that is has the power to ruin lives. That can be said about the FBI, the DEA, the BATF, and all sorts of other enforcement agencies.

What irks people about the IRS is that it has so much power combined with the fact that the internal revenue code is a nightmare of complexity that can overwhelm even the most well-intentioned taxpayer. Just spend a couple of minutes watching this video if you don’t believe me.

I’ve already shown depressing charts on the number of pages in the tax code and the number of special breaks in the tax law. To make matters worse, not even the IRS understands how to interpret the law. According to a recent GAO report, the IRS gave the wrong answers on matters of tax law more than 530,000 times in 2010.

Yet if you use inaccurate information from the IRS when filing your taxes, you’re still liable. To add insult to injury (or perhaps injury to injury is the right phrase), you’re then guilty until you prove yourself innocent – notwithstanding the Constitution’s guarantee of presumption of innocence.

Now we have some new information showing the difficulty of complying with a bad tax system.

A new report from the Treasury Department reveals that volunteers (who presumably have the best of intentions) make mistakes in more than 50 percent of cases.

Here are some key excerpts from the report.

Of the 39 tax returns prepared for our auditors, 19 (49 percent) were prepared correctly and 20 (51 percent) were prepared incorrectly. The accuracy rate should not be projected to the entire population of tax returns prepared at the Volunteer Program sites. Nevertheless, if the 20 incorrect tax returns had been filed: 12 (60 percent) taxpayers would not have been refunded a total of $3,996 to which they were entitled, one (5 percent) taxpayer would have received a refund of $303 more than the amount to which he or she was entitled, one (5 percent) taxpayer would have owed $165 less than the amount that should have been owed, and six (30 percent) taxpayers would have owed an additional total of $1,483 in tax and/or penalties. …The IRS also conducted 53 anonymous shopping visits during the 2012 Filing Season. Volunteers prepared tax returns for SPEC function shoppers with a 60 percent accuracy rate.

So here’s the bottom line. We have a completely corrupt tax system that is impossibly complex. Yet every year politicians add new provisions to please their buddies from the lobbyist community.

Wouldn’t it be nice if we could rip up all 72,000 pages and instead have a simple and fair tax system?

Sadly, tax reform is an uphill battle for four very big reasons.

  • Politicians don’t want tax reform since it reduces their power to micro-manage the economy and to exchange loopholes for campaign cash.
  • The IRS doesn’t want tax reform since there are about 100,000 bureaucrats with comfy jobs overseeing the current system.
  • Lobbyists obviously don’t want to reform since that would mean fewer clients paying big bucks to get special favors.
  • And the interest groups oppose the flat tax because they want a tilted playing field in order to obtain unearned wealth.

But there are now about 30 nations around the world that have adopted this simple and fair system, so reform isn’t impossible. But it will only happen when voters can convince politicians that they will lose their jobs if they don’t adopt the flat tax.

P.S. I’ll also take a national sales tax, like the Fair Tax, as a replacement. But since I don’t trust politicians, that option requires that we first replace the 16th Amendment with something so ironclad that not even Chief Justice John Roberts would be able to rationalize that an income tax was permissible.

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I’ve expressed concern about QE3 and other decisions by the Federal Reserve about monetary policy, but I have also admitted that it’s difficult to know the right monetary policy because it requires having a good idea about both the demand for money and the supply of money.

But this raises a bigger issue. The only reason we expect the Fed to “know the right monetary policy” is because it’s been assigned a monopoly role in the economy. But not just a monopoly role, we also expect the Fed to be some sort of omniscient central planner, knowing when to step on the gas and when to hit the brakes.

And we also are asked to suspend reality and assume that the folks at the Fed will be good central planners and never be influenced by their political masters. Yeah, good luck with that.

With so many difficult – or perhaps impossible – demands placed upon them, no wonder the Fed has a lousy track record (as documented in this powerful George Selgin video).

So let’s ask a fundamental question. Is the Fed necessary? Are we stuck with a central-planning monopoly because there’s no alternative? Professor Larry White says no in this new video from Learn Liberty.

This is one of the best videos I’ve ever seen, so I strongly encourage everyone to share this post widely.

Professor White effectively demonstrates how private markets can replace the five different roles of the Fed. But his arguments are not just based on theory. He shows that the private sector used to handle those roles in the past.

And I especially like his point about how a decentralized market system would operate. Indeed, I would have stressed even more how such a system overcomes the knowledge problem that exists with a monopoly central planner.

Here’s my video on the Fed. I focus more on how central banks developed, but you’ll see some common themes in the two videos.

P.S. Here’s a video with 10 reasons to dislike the Fed.

P.P.S. If you want some Fed humor, we have a Who-is-Ben-Bernanke t-shirt, this Fed song parody, some special Federal Reserve toilet paperBen Bernanke’s hacked Facebook page, and the famous “Ben Bernank” video.

P.P.P.S. Professor White’s video shows how we can improve monetary policy, but let’s also be aware that there are proposals that would lead to even worse monetary policy.

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