Unique among countries of the world, the foundation of the United States rests on self-evident moral principles. These are simply, that all men are created equal, that they are endowed by their creator with certain unalienable rights. These moral principles pervade every institution and aspect of life in the United States except one - tax.

I do not deny the fact that the government needs money to provide basic services in order to have a functioning and orderly society. Nonetheless, it is fair to question what the tax money is being spent on and how it is raised. In the United States, 16% of the federal budget goes for defence and less than 2% goes to criminal justice. The rest goes to welfare and wealth redistribution programs. Essentially, the government extracts money by force of law from one small segment of the economy and gives it to a larger group in return for their votes.

Ignored in the current tax system, is something which Chief Justice John Marshall observed in 1819, when he said that any tax system creates a threat to individual liberty because, "the power to tax involves the power to destroy". The current tax system is destructive of the IRS, the agency which must administer the tax law, the taxpayers who cannot possibly comply with all the complexities and burdens of the tax law, and society as a whole which struggles under this unyielding burden.

Is there anyone who can deny the oppressiveness of trying to fully comply with the current income tax code? Presently, it is estimated that Americans spend some 4.6 billion hours trying to make correct federal income tax filings. Attempting to comply with state income tax and city income tax adds additional billions of hours. The cost has been kindly estimated at USD60 billion which I think substantially underestimates the amount of money wasted by taxpayers in fulfilling their filing obligations. In addition, the busy work imposed by the tax code involves a dead weight loss on the economy which has been estimated at some USD140 billion. Preparing tax returns has become so difficult that 57% of individual taxpayers effectively have given up trying to prepare their individual returns and have turned to professional tax preparers. It is virtually impossible for a business to prepare even the simplest form of corporate tax return.

Even the government recognises the problems dealing with the income tax system. Recently, the Assistant Secretary for the Treasury for Tax Policy commented on the US tax complexity. She noted that there are a number of basic problems undermining the US tax system and she focused on three. These were complexity, the inconsistency of the rules with the values of American society, and the inconsistency of the rules with our economic interest as a nation. When the federal income tax started in 1913, there were four hundred pages of rules and a basic tax rate of 1%. Presently, the tax laws and regulations are spread over some 46,000 pages with every single complex provision of the income tax law subject to civil and criminal penalties.

The point of view of Congress and, as a result, the guidance being picked up by the IRS, is that any taxpayer not fully paying every ounce of tax possible is evading tax. This goes contrary to the widely quoted opinion by Judge Learned Hand who said, "Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." The reality is that Congress and the IRS, follow the philosophy that everyone should arrange their affairs to pay the maximum amount of tax; that paying the maximum amount of tax is a patriotic duty; and that anyone failing to fulfill this duty should be prosecuted.

While the Constitution embodies in legal terms the moral principles of the United States, it is clear that Constitutional rights, such as financial privacy, do not apply when taxes are involved. In addition to business records, the IRS has access to individual records, credit card data, phone records, personal banking and investment records, and even personal correspondence. The IRS is able to exert this authority to obtain records without any court order whatsoever. As noted in one Supreme Court case (United States v Powell) this was referred to as a "power of inquisition".

While the presumption of innocence is the foundation of English and American law, the tax code does not follow this principle. Under the tax law, the IRS is presumed to be correct in its determination and the burden of proof shifts to taxpayers. Although efforts were made to shift the burden of proof back onto the IRS in 1998, the IRS Restructuring and Reform Act did not rise to the challenge. The IRS easily evades most of the new rules by claiming, for example, that actions they are taking are administrative in nature and therefore do not fall under the 1998 Act.

Much is made in television shows like Law and Order, which forever portray legal battles over the Fifth Amendment protection against self incrimination. This is where criminals have a right to the so-called "Miranda" warnings and which judges then regularly toss out evidence. None of this really applies in tax cases. In the first place, taxpayers are required to sign the tax returns under penalties of perjury. Failure to do so is a violation and the tax return is considered not filed. As a result, the taxpayer is exposed to being prosecuted for failure to file the return. Additionally, information provided on the tax returns is a waiver of all Fifth Amendment protections. In fact, when it comes to the application of criminal law to tax returns, the whole system is one big Catch - 22. Furthermore, although there is a Privacy Act in place, the IRS regularly provides information to other federal, state and local governmental agencies not only for tax purposes, but also so it can be used in other criminal and civil enforcement actions.

Another cornerstone of the American legal system is a guarantee of equal protection under the law. Nowhere is it more prominently violated than the US tax system. The difference in tax burden on taxpayers on different income levels is shocking to say the least. The prevailing political wisdom is that the most productive taxpayers have to redistribute their money to the less productive. Nobody questions the fact that basically everyone is given an equal amount of government services but the burden is not equally shared. That is, the army protects the poor as well as the rich and the highways are open to anyone whether they are driving a Mercedes Benz or driving a Honda. Nonetheless, the politicians knowingly promote the false idea that the rich are not paying their fair share.

The fact is that the highest income 1% of the households pay 36% of individual income taxes. The top 5% of the households pay 56% of individual income taxes. The share of all individual income taxes paid by the top 1% of the households has increased from 19% in 1980 to 36% currently. Basically, the bottom 50% of the taxpayers in the United States pay almost no income tax at all. It is clear that the bottom 50% vote for politicians who promote this form of taxation because they are getting an increasing number of government benefits at virtually no cost at all to themselves. If nothing else, it is now clear that the income tax system in place in the United States today clearly violates the US Constitutional provisions which require equal protection under the law.

During the past number of years, the Congress of the United States and some international non-governmental organisations, such as the OECD, have been promoting the idea that utilising low taxed foreign countries is somehow unpatriotic and undermines the industrial countries' economy. What is implied by government or sometimes even overtly said, is that business people and their tax lawyers who try to use tax beneficial structures to reduce tax are scallywags and scoundrels.

The fact is that the government's promotion of maximising the tax burden is what is dragging our economies down. Individuals who can lower their tax burden, benefit the economy by saving or investing or consuming, all of which are desirable behaviors for a prosperous economy. Corporate executives who reduce the company's tax burden provide customers with lower prices, their employees with higher pay and the owners of the company, the shareholders, obtain a higher yield on investment returns. All this translates into more retirement security and growth of business investment. Tax competition between countries is also good.

Tax competition reduces the ability of the government to raise taxes and thereby causes the government to use lower tax rates. It is difficult to deny the fact that competition forces the government to be more efficient and less repressive. It is clear that those governments which have dramatically reduced their tax rates have enjoyed the most dynamic and prosperous economies in the world. Individuals and their businesses create wealth. The only thing that government creates is debt and taxes.

There is something radically wrong with the income tax system. It is for the most part driven by errant socialist policies by a runaway government's insatiable desire to create more programs for newly created societal needs. Our politicians feel no remorse in either abusing the taxpayer's money or virtually regulating away our constitutional rights. It is not enough to say that the income tax system is unfair or inequitable or even unreasonable. It is beyond that. It is immoral.

www.kleinfeld.com


© by Denis A. Kleinfeld
The Kleinfeld Law Firm
Miami, Florida, USA