Many Americans filling out their income tax returns 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 cut taxes, the tax code remains a monument to social engineering run amok.
Help may be on the way with Republicans in Congress planning to move ahead with reforms next year to replace the income tax with a low-rate consumption-based tax. Such reforms would go a long way toward reducing the following ten civil liberties abuses of 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 in taxes. IRS data show that income taxes average 26% for those earning more than $200,000, but 10% for those earning between $30,000 and $75,000. Joint Tax Committee data show that 39% of households pay no income tax at all. These inequities violate the spirit of equal protection guarantees in the Constitution, and cause many Americans to think that government programs have no cost.
2. Horizontal Inequality.
Even people with similar incomes are treated unequally by the many 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 the many narrow tax loopholes carved out by Congress. Rules for savings vehicles in the tax code also create damaging inequities. For example, many Americans do not have access to retirement savings accounts through employers.
3. Complexity and Ambiguity.
Certainty in the law is a bulwark against arbitrary and abusive government. But the income tax rests on an inconsistent and ambiguous base, and it spans 60,044 pages of laws and regulations, according to CCH Inc. Americans are baffled by the complex rules on capital gains, savings plans, education incentives, and other items. The IRS itself is also baffled by tax complexity–Treasury investigations in September and January found that IRS employees provided incorrect answers 55% and 83% of the time, respectively. Tax complexity is getting worse with 33 million Americans by the end of the decade facing double jeopardy by having to pay the Alternative Minimum Tax on top of the regular income tax.
4. Instability of Tax Law.
Citizens are required to know the nation’s laws and comply with them, but that is difficult when federal tax rules are constantly changing. Major tax bills contain hundreds of law changes, with many changes spurring years of regulatory and court activity before taxpayers have solid rules to follow. For example, changes in pension tax rules occur nearly every year, leaving employers struggling to comply. Tax cuts in the past three years have created a mish-mash of expiration dates, guaranteeing tax instability for years to come.
5. Lack of Financial Privacy.
The broad reach of the income tax leads to invasions of financial privacy. To enforce the income tax, the IRS accesses a myriad of personal information, such as mortgage records, credit card data, phone records, banking and investment accounts, data on property transactions, and personal correspondence. This broad IRS authority to obtain records without court supervision has been called “a power of inquisition” by the Supreme Court.
6. Denial of Due Process.
Many aspects of the income tax bypass the 5th Amendment right to due process. Due process requires that the government provide a clear notice of a claim against citizens and a hearing before enforcement is executed. But the IRS engages in many summary judgments, which are enforced prior to judicial determinations. Moreover, the complexity and ambiguity of the income tax violates the spirit of due process. The Supreme Court has 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 tax cases, which are the vast majority of 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 the correctness of its determinations. When the IRS makes erroneous assessments, as it often does, citizens have the burden to prove that the IRS is wrong. New rules to shift the burden of proof to the government in 1998 did not accomplish that goal and do not apply to most IRS actions, which are deemed administrative in nature.
8. No Trial by Jury in Tax Court.
The federal tax system sidesteps the 6th and 7th Amendment guarantees of trial by jury. To contest an IRS assessment, one can file a petition in the U.S. Tax Court. But because this is an administrative court, no jury trial is 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 eliminating a person’s rights.
9. Unreasonable Search and Seizure.
The 4th Amendment guarantees that before the government searches private property and seizes records, it must show a court “probable cause” of lawless conduct. Sadly, the IRS has a history of abusive searches and seizures on individuals and businesses. Besides, the IRS summons authority allows it to obtain a huge range of taxpayer records without showing probable cause and without a court order. Indeed, there has been an explosion in IRS information reporting requirements, such as the agency’s new authority to gain financial data related to Visa cards issued by foreign banks.
10. Forced Self-Incrimination.
The requirement to file tax returns under penalty of perjury counters the spirit of the 5th 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 5th Amendment protections. Worse, tax return information does not stay with the IRS, it can be released to federal, state, and local agencies for non-tax purposes.
Replacing the income tax with a low-rate consumption tax would greatly 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 families, and reduce the need for the IRS to probe personal financial records. Congress can champion economic growth and civil liberties at the same time by setting the goal of overhauling the tax code by next April 15.