FEDERAL TRIANGLE: Wasteful Transfers
Economists usually describe activity in terms of what did (or is forecast to) occur, but rarely do they account for costs associated with redistribution of wealth, which appears in the forms of (a) attempts to appropriate wealth of others and (b) attempts to prevent appropriation of one's own wealth. In the vernacular, it's called stealing, underestimated in a recent study by David Laband and George McClintock to cost America $424 billion annually for forced asset transfers. They contend (I think correctly) that the public makes a distinction between actions taken to define and enforce property rights and those designed to involuntarily redistribute existing rights. If this sounds too esoteric, recall that the most overt mechanism for redistributive activity is taxation, together with the many investments made by private parties to perpetuate or prevent legal transfers, or made by the state to ensure transfers. As these examples show from the study titled "The Transfer Society," legal transfers do not occur without cost, the cumulative resources spent by all affected parties to the outcome (Table 1).
The cost to the American public for the U.S. income tax system is staggering. In fiscal year 2001, the IRS budget was $9 billion; it employed 97,000 people and used 74,000 volunteers and 24,000 tax workers in other federal agencies. Of 1.6 million U.S. accountants, 480,000 are in tax practice; of 1,048,000 lawyers, 105,000 are in tax practice. There are about 35,000 more tax specialists, and U.S. Census data indicates that there are 363,000 tax workers in state and local government. More workers are in the tax industry than in the entire motor vehicle and automotive parts industry combined.
The income tax began in 1909 at a 1% corporate rate. The individual income tax began in 1913 based on the U.S. Constitution's 16th Amendment with rates from 1 to 7%. These income tax laws were 16 pages long; today they span 45,662 pages and account for 21% of gross domestic product. About 73 million individual taxpayers use paid preparers, and Office of Management and Budget estimates that 6.1 billion hours are spent, costing $183 billion for compliance with 55% of the burden falling on business. The income tax system requires the added costs of enforcement, but government still loses $200 billion (17%) of potential revenues to noncompliance. Law changes alter regulation with increased complexity and create uncertainty; the IRS itself reports that 86% of corporate tax disputes are due to differing interpretations of tax laws. This is an absolute waste because no goods or services are produced to increase national wealth.
According to a Cato Institute policy analysis authored by Chris Edwards, the major reason for tax complexity is "there is no consistent standard under present tax policy for what constitutes income or when it should be taxed." Congress has no lasting policy on capitalization, and it has changed treatment of capital gains 25 times since 1922. This tax instability has withered personal savings discipline and distorted investment decisions of industry. In Congressional testimony, Intel vice president for taxes opined that international tax rules are putting U.S. headquartered multinationals at a competitive disadvantage: "If I had known at Intel's founding what I know today...I would have advised the parent company be established outside the U.S. ...The degree to which our tax code intrudes upon business decision-making is unparalleled in the world."
Solution to these problems comes by changing the taxation method from income to a consumption-based system, either a flat tax or retail sales tax. There are many good reasons to select the latter. It must be done. A founder's admonition is appropriate to recall. James Madison wrote in Federalist Paper 62, "It will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood...or undergo such incessant changes that no man who knows what the law is today, can guess what it will be tomorrow."