Would the Freedom Tax Abolish the IRS?

The IRS now requires nearly 95,000 employees and an annual operating budget of almost $13 billion to administer a taxation system having a design based upon over 77,000 pages and 5 million words of incomprehensible tax law.  The FreedomTax would have a simple and less-burdensome tax design, estimated to reduce the size of the present Tax Code by 95%. The FreedomTax would end the IRS as we know it. The average American would see this equivalent to abolishing the IRS.

By James K. Jeanblanc | October 28, 2015

Those wishing to abolish the IRS have asked if the FreedomTax would do this.  The wish overlooks the hard fact – every tax system requires a government agency to administer it.  Also overlooked is that a bad tax makes for a bad tax administrator.  So, if the IRS were ever to be abolished without changing the system, its successor likely would become just as bad, and maybe even worse.

The IRS is a symptom of the much larger problem.  Our system for taxing income is of very poor design and has become so decrepit that it requires an aggressive and heavy-handed IRS just to keep it running.  The system is insanely complicated and grossly inefficient, imposing undue compliance burdens and allowing large chunks of income to escape taxation.  Past efforts to reform it, as well as the lack of consensus on the next reform to make, indicate that in the absence of a total re-engineering, the system may not even be fixable.

The FreedomTax would redesign and modernize the income tax into an efficient tax system.  Directly resulting from this reform would be the end of the IRS as we know it.  The average American would see this equivalent to abolishing the IRS.

Under the FreedomTax, most Americans would never again have to file an income-tax return.  The tax on most types of personal income (salaries and wages, dividends, interest, and pensions) would be collected at source.  For these Americans, not having to file any tax return, gone would be the fear of an IRS tax audit.  Gone would be the fear of a claim they owe more taxes.  And, gone would be the fear of hackers filing fraudulent income-tax returns with the IRS in their names and of hackers accessing their personal information from the IRS for identity-theft purposes.

The FreedomTax’s simplicity, fairness, and low rate of taxation (to be set at 10% on all income) would substantially reduce compliance burdens and the incentive to engage in tax avoidance transactions and tax evasion.  This would be in sharp contrast to the present high tax-rate system with its innumerable special rules and tax exceptions giving rise to a heavily intrusive and punitive IRS to avert widespread non-compliance.

The FreedomTax would convert the income tax from its archaic design of a tax imposed upon the person paying the tax, into a true tax on income. This would move the IRS away from its strict focus upon the income recipient, such as who the recipient might be, how he spends his income; and in the case of an organization, how it might be organized and what are its activities. Ending the tax focus on the person will eliminate the ability of the IRS to use the income tax as a weapon against political opponents and persons in disfavor.

The IRS now requires nearly 95,000 employees and an operating budget of almost $13 billion to administer a taxation system having a design based upon over 77,000 pages and 5 million words of incomprehensible tax law.  The FreedomTax would have a simple and less-burdensome tax design, estimated to reduce the size of the present Tax Code by 95%. As already noted, it would restructure the income tax into a true income tax with a low flat-tax rate, simple in application, and tax-efficient.   Having a “good tax” to administer, the IRS successor will require far fewer employees and would be dramatically downsized, saving the Treasury billions in administration costs. Indeed, with the old IRS gone and remade into a new tax agency, it likely would be renamed, perhaps to the “Bureau of Tax Administration” (the “BTA”).

The FreedomTax would end the IRS as we know it and would accomplish much more. It would be of incredible benefit to taxpayers in terms of time and compliance costs saved. Perhaps even more important, it would modernize the income tax to end its drag on economic growth and overall prosperity.