Many Americans filing their income taxes are appalled by the large amount of earnings taken by the government. The income tax is also appalling from a civil-liberties perspective, because of its inequity, complexity, and intrusiveness. While President Bush has cut taxes, the tax code remains a monument to social engineering run amok.
Help may be on the way, however, with some congressional leaders planning to move ahead with reforms next year to replace the income tax with a low-rate consumption-based tax. That would go a long way toward reducing the following civil liberties abuses administered by the current tax regime:
1. Vertical Inequality. Although equality under the law is a bedrock American principle, individuals pay greatly different shares of their earnings to taxes. IRS data show that income taxes average 26 percent of income for those earning more than $200,000, but 10 percent for those earning between $30,000 and $75,000. Joint Tax Committee data show that 39 percent of households pay no income tax at all.
2. Horizontal Inequality. Even people with similar incomes are treated unequally by exemptions, deductions, and credits in the tax code. Taxes differ based on whether people are married or own a home, and whether they can benefit from tax loopholes carved out by Congress. Rules for savings vehicles in the tax code also create damaging inequities with many Americans not having access to retirement savings accounts through employers.
3. Complexity. Certainty in the law is a bulwark against abusive government. But income taxes are hard to understand and the rules now span 60,044 pages, according to CCH Inc. Americans are baffled by the complex rules on capital gains, savings plans, education incentives, and other items. The IRS is also baffled — recent Treasury investigations found that IRS employees gave incorrect tax answers anywhere from 55 percent to 83 percent of the time. Tax complexity is getting worse with 33 million people facing the alternative minimum tax on top of regular taxes by 2010.
4. Instability of Tax Law. Citizens are required to comply with the tax laws, but that is difficult when the rules are constantly changing. Major tax bills contain hundreds of law changes, with many changes spurring years of regulatory and court activity before taxpayers gain clear guidance. Tax cuts in the past three years have created a mish-mash of expiration dates, guaranteeing instability for years to come.
5. Lack of Financial Privacy. The broad reach of the income tax leads to invasions of financial privacy. The IRS can access myriad personal information, such as mortgage records, credit card data, phone records, banking and investment accounts, data on property transactions, and other items.
6. Denial of Due Process. The Fifth Amendment right to due process requires that government provide a clear notice of a claim against a citizen and a hearing before any enforcement action. But the IRS uses summary judgments, which are enforced prior to judicial determinations. Also, the tax system’s complexity and ambiguity violate the spirit of due process. The Supreme Court noted that a statute that is “so vague that men of common intelligence must necessarily guess at its meaning and differ as to its application, violates that first essential of due process of law.”
7. Shifting of the Burden of Proof. For non-criminal cases, the tax code reverses the common-law principle of the burden of proof resting with the accuser. Except in some narrow cases, the IRS does not have to prove that its determinations are correct. When the IRS makes errors, as it often does, citizens have the burden to prove that it is wrong.
8. No Trial by Jury in Tax Court. The tax system sidesteps the Sixth and Seventh Amendment guarantees of trial by jury. To contest an IRS assessment, one can file a petition in the U.S. Tax Court, but as an administrative court a jury is not required. To obtain a jury trial and related rights for civil tax cases, one can file suit in a U.S. District Court. But the alleged tax, penalties, and interest must be paid in full beforehand, thus effectively nullifying a person’s rights.
9. Unreasonable Search and Seizure. The Fourth Amendment guarantees that before the government searches for and seizes records, it must show a court “probable cause” of lawless conduct. Sadly, the IRS has a history of abusive searches and seizures. Besides, the IRS’s summons authority allows it to obtain a large and growing range of taxpayer records without showing probable cause or a court order.
10. Forced Self-Incrimination. The requirement to file tax returns under penalty of perjury counters the spirit of Fifth Amendment protection against self-incrimination. Citizens are prosecuted for failure to file, but by disclosing all the information demanded by the IRS, taxpayers are waiving their Fifth Amendment protections.
Replacing the income tax with a low-rate consumption tax would reduce these problems. For example, the Dick Armey flat-tax would exempt the returns to saving from tax at the individual level, which would simplify the tax code, create equal savings benefits for all, and reduce the need for the IRS to probe personal financial records. Let’s strike a blow for economic growth and civil liberties by overhauling the tax code by next April 15.
– Chris Edwards is director of fiscal policy at the Cato Institute.