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Formally, federal tax law is a particular chapter (Title 26) of the United States Code. The federal tax law contains 11 subtitles, which among them comprise 9,833 sections.
The number of words in the tax code? No one knows. Seriously, no one knows. The lower bound seems to be 16,000 pages, and even that’s not definite. A conservative 250 words per page, and that’s 4 million words. Even counting the number of sections is exhausting. They go from 1 to 9873, and counting, but plenty of numbers are missing.
The IRS estimates that it collected $2,691,538,000,000 in the last fiscal year available, 2007. There are three horrible truths enclosed in that statement, the first one being that $2.7 trillion is way too much money to run a government:
-There’s an electronic record of everything. The IRS should be able to calculate how much it collects to the penny, not merely to the nearest million dollars.
-Ditto for the most recent year available. Why can’t the IRS have accurate figures for 2009, or at least 2008?
That’s about $8,900 per person, not counting the hours that go into calculating the tax we each owe.
Thus our recommendation of the diagonal tax. This is what’s commonly referred to as a “flat” tax, but that name implies that we’d all pay the same rate. No serious flat tax plan really works that way, because it makes it difficult for low-income people to ever catch up and build any wealth. The proposal involves a standard deduction for every taxpayer, ideally enough to cover all cost-of-living expenses. Tax collectors then levy a flat tax on the remainder after the deduction, which means the tax is anything but flat.
The Tax Foundation estimates that we spend a total of $25 billion and 21 hours per taxpayer preparing or getting other people to prepare our taxes. 174 million returns a year, that’s almost 3.7 billion hours. Estimate an average wage of $16/hour, that’s another $58 billion in opportunity cost.
There’s more. The IRS has 101,000 employees. Assuming they each work 1800 hours a year, that’s 181,800,000 hours. A diagonal tax form would be the size of the fabled postcard, and wouldn’t require any creature more advanced than a trained chimp to process it. Let’s assume that a diagonal tax could reduce the ranks of the IRS teatsuckers by 90%, and that the average IRS employee makes $20/hour. That’s another $3,272,400,000 we could save. The very act of collecting taxes costs our economy $86 billion a year before one dollar goes to anything other than the IRS’ own continued existence. Granted, that’s only 3% of the IRS’ returns, but it’s a start.
So…how to confiscate that $2.7 trillion by fairer means?
The Census Bureau estimates that 47.37% of all Americans make under $25,000 a year. That’s the set of all Americans, not the subset of tax filers, so we have to account for that. Does $25,000 sound like a reasonable amount to keep exempt from taxes? Let’s make that the standard deduction then and, using the Census Bureau’s remaining numbers, figure out how much income remains taxable.
Can you trust us that we did the math accurately? You can repeat the results yourself. We used this page and calculated how much income remains in each bracket after deducting $25,000 per person. We assumed that the numbers were evenly distributed in each bracket. For instance, the chart says that 9,192,000 Americans made between $25,000 and $27,500 last year. We thus assumed that the average person among those 9,192,000 made $26,250. This might be reasonable and might not, but there’s little room for fluctuation in the numbers. We then repeated the process for every bracket up to $95,000– $100,000.
The taxable income of all Americans making under $100,000 would thus total about $2,251,340,000,000.
Subtracting that from the nation’s gross domestic product, and dividing by the number of people making over $100,000, our conclusion?
If our elected representatives authorized a straight 28% tax, given the $25,000 exemption, the IRS’ tax collectors would take in as much as they do today.
How would that affect you? It’s easy to figure out. If you make $30,000, your tax bill would be $1,400 – an effective tax rate of an eminently livable 4.7%. If you make $90,000, you’d pay $18,200, or barely 20%.
HOWEVER:
You wouldn’t waste your time looking for artificial ways to reduce your tax bill, counterintuitive activities such as tallying up your gambling losses. You wouldn’t have to save a single receipt. Doing your taxes would take 8 seconds. Not only would everything run more simply and efficiently, but more to the point, you’d have incentive to continue working and helping the economy grow.
Right now, the highest marginal tax rate in the United States is 35%. Reduce it to 28%, and it’d be at its lowest level since 1931.
The downside? Politicians wouldn’t be able to curry favor with certain people. Lobbying for a particular industry (which means, by definition, doing so at others’ expense) wouldn’t make any sense. You wouldn’t get punished for not having kids, or rewarded for borrowing money to buy a house – but if you tell the average person that he’s gaining a tax advantage, even if he’s losing a concomitant smaller one, all he’ll think about is the latter. Heck, the authors have a standing bet that at least one commenter will mention that it’s unfair to tax poor and rich people at the same rate, conveniently ignoring the part about the standard deduction. God bless our uneducated country.
