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There has been much discussion about which
banks and other financial institutions are
"too big to fail." In reality, no
institution is too big to fail, including
any private company or political entity,
whether it is Detroit or the former Soviet
Union.
The more relevant question is, which
institutions are "too big to succeed"? When
asked about President Obama's slew of recent
troubles, former presidential adviser David
Axelrod correctly noted that the U.S.
government is too big to manage.
It is not only true of the government as a
whole, but also true of some of its parts,
notably the Internal Revenue Service. Which
is why the IRS is in the process of failing.
The IRS has an impossible job: manage and
enforce the income tax plus a host of other
activities, now including Obamacare. The
problems begin with the fact that the tax
code misdefines income.
The IRS defines cash flow as income, but
economists know that real income is the
ability to consume. Cash flow resulting from
inflation does not increase the ability to
consume, yet the IRS often taxes it -- and
this is just one of many problems with the
agency's income definitions.
The IRS taxes labor and capital multiple
times, which creates enormous biases in the
tax system favoring consumption over work,
saving and its productive investment, and
entrepreneurial risk-taking. Over time, such
taxes eat away at productivity growth,
resulting in lower economic growth, slow or
negative job creation, and deteriorating
living standards.
The high marginal income-tax rates that
individuals and businesses face provide
strong incentives for taxpayers to find both
legal and illegal ways around the tax. To
counter this erosion of the tax base, the
IRS devises ever more invasive, costly and
liberty-destroying rules.
Also, members of Congress and the
administration use the tax code to reward
friends and punish enemies -- by adding
endless special-interest provisions -- which
in turn induce campaign contributions both
from the grateful and the fearful. The
result is an ever-growing tax code that no
one understands -- let alone fairly
enforces.
In 1913, the tax code consisted of 400
pages; by 1945 it had grown to 8,200 pages;
by 1984, 26,300 pages; and today is
estimated at more than 75,000 pages --
despite periodic reforms.
There is no politically doable tax
reform shy of abolishing the income tax,
which would reverse this process.
In a global economy, businesses and wealthy
individuals can legally choose where to
locate many of their activities. Localities
that have high tax rates -- Detroit and
France being the poster children -- drive
businesses and the productive away. The
United States, with the highest corporate
tax rate in the world and increasingly
destructive regulation, is driving
multinational corporations and the jobs they
create out of America.
Political leaders who have been responsible
for the lack of growth and job creation are
now in the process of trying to build an
international tax cartel in an attempt to
keep the corporate and individual income-tax
slaves on the welfare-state plantations.
Ultimately, they will fail because if tax
slaves are not allowed to flee, they will
revolt.
The welfare-state politicians are using a
two-pronged strategy to keep taxpayers in
bondage. They are trying to create global
tax-information sharing among governments,
and global minimum income-tax rates.
The just-concluded meeting of the Group of
20, using an Organization for Economic
Cooperation and Development proposal as the
cover, was the most explicit attempt yet to
do the above. The United States has been
trying to impose its Foreign Account Tax
Compliance Act or FATCA -- which would force
foreign financial institutions to report to
the IRS -- on other countries but,
fortunately, has been meeting stiff
resistance from responsible private parties
and governments forcing a further delay in
its implementation (now not until July
2014).
Those in government assure us that our tax
information they intend to share with
foreign governments will be kept
confidential and not be abused. Only the
terminally naive believe that.
The IRS scandals will not go away because
the measures needed to keep businesses and
individuals on the tax plantation will
become increasingly repressive, depressing
economic growth and increasing resentment
among taxpayers. It does not help that the
IRS attracts as employees, for the obvious
reasons, a disproportionate share of
bullies, sadists, incompetents and those who
have no understanding of the importance of
the rule of law and liberty.
Eventually, citizen anger grows to the point
that the resistance against the
tax-collection agency results in such a
level of noncompliance that less and less
revenue is collected, as we now see in
Greece and elsewhere.
The income tax and the intrusive, abusive
IRS are not necessary. The legitimate and
proper functions of government can be
financed through a combination of user fees
and consumption taxes. The only real
question is whether our political leaders
will be wise enough to abolish the income
tax and the IRS before the total breakdown,
or after?
Richard W. Rahn is a senior fellow at
the Cato Institute and chairman of the
Institute for Global Economic Growth.
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