The Tax Cost

So, in this presidential campaign the tax issue seems to be cursorily addressed. Beyond Joe the Plumber™'s tax bill, the discussion has been quite empty of substance. Again, this is an issue where McCain could have had a massive advantage, had he done his homework. There are several questions that a conservative politician should be able to answer regarding tax policy:

Q: What are income taxes for?
A: Income taxes are an imposition that the state creates on the people it governs to finance its activities.

Q: What income taxed should not be for?
A: Income taxes should not be used for wealth redistribution, to "spread it around", to do social engineering, to do welfare, or to subsidize businesses. This just creates a complicated set of tax codes and regulations that results in an additional tax. Only corporations big enough to pay for tax lawyers and accountants can navigate through the labyrinth of tax regulations. As always, Joe the Plumber™ won't be able to pay for all that and end up paying more than it should.

On this, I will elaborate a little further. I downloaded the US Tax Code and did a word count. Here's what I got:

8,590 pages

3,692,671 words

18,738,328 characters (no spaces)

450,767 paragraphs

489,619 lines

ASCII text file's size was 26 MB

As a comparison, the King James Bible, the Protestant standard of the Bible in English, has 783,137 words and 3,566,480 letters. The tax code is 5 times longer than the King James Bible! Worse, there are no stories, so it is not as entertaining. Well, maybe it is as entertaining as the Bible's book of Numbers. To comprehend that incomprehensibly massive piece of work we have developed a bureaucracy inside and outside the government. Checking at the IRS 2008 budget, this organization will spend in taxpayers' guidance and enforcement about $6.93 billion on 2008 out of a $10.9 billion budget. I don't know how much of that would be saved if we had a simpler tax code. Even if $6b is not a lot of money in US Government talk, a billion here, a billion there and pretty soon you're talking real money. However, that is not all the tax that this tax code creates. I checked the statistics of three of the Big Four accounting firms: PWC, KPMG, Deloitte, and E&Y. Using a very rough approximation I estimated their tax practices' revenues in the US approximating to $3 billion per firm, or $12 billion for the Big Four. Say these guys have 80% of the market, so, I am guessing $15 billion a year industry. This is without including tax lawyers whose revenue I haven't estimated. Additionally, we are training a bunch of people in colleges and universities around the country to deal with this creation of government, taking them away from other areas in which they would produce a more desirable output for society: doctors, engineers, entertainers, etc. That additional opportunity cost adds up to real money.

So, for a second imagine a tax code with zero corporate tax rate and no deductions beyond a large standard deduction. Capital gains taxes, with the base price being indexed by a deflator, would be lumped with ordinary income. Now, that would be simple, easy to monitor, and fair regardless of the progressive tax rates that the government undoubtedly would have to implement. Maybe John Lennon should have written "Imagine" for tax codes instead of peace in the world: he would have helped more.

I included an elimination of corporate income tax, as it makes no sense: corporations are not people. The outlays from these corporations to the people in form of compensation, dividends and share purchases should be the object of tax, which anyway would be lumped into the person's ordinary income.