he American public has long held an unfavorable view of the Internal Revenue Service, as evidenced by several historical surveys. A Gallup poll taken more than 25 years ago in October 1997 found that 69 percent of the American public held the opinion that the IRS “frequently abuse[d] its powers.” Fast forward to October 2022, when another Gallup poll was taken on the American public’s job-performance rating of 11 federal agencies. The poll ranked the IRS dead last, with only 34 percent of Americans regarding the job performance of the IRS as “excellent/good.”
Another poll released by the Pew Research Center in March 2015 on the “complexity of the tax system” indicated that 72 percent of the American public were at least somewhat bothered by the complexity, and 44 percent were a lot bothered by it. Public concern over the complexity of the federal tax code is certainly understandable when you consider that the body of law that codifies all federal tax laws, the Internal Revenue Code (U.S. Code Title 26), comprised 6,979 pages as of year-end 2022.
Aside from the American public’s unfavorable view of the tax system, there is a real economic reason for addressing its complexity: the enormous cost of compliance for the American taxpayer, both individual and corporate. The Tax Foundation issued a report in August 2022 estimating that “Americans [would] spend over 6.5 billion hours complying with IRS tax filing and reporting requirements in 2022.” This equates to approximately 3.1 million full-time workers focused entirely on federal tax compliance.
The Tax Foundation estimates that the monetary cost of compliance based on its estimated 6.5 billion work hours would at minimum amount to $313 billion in 2022 — nearly 25 times greater than the IRS’s $12.6 billion 2022 budget with a workforce of approximately 80,000 employees.
An additional unknown cost of significant size is the time spent by American taxpayers in calling the IRS for tax-filing assistance. Based on information from the IRS’s Taxpayer Advocate Service, Americans made 72.8 million calls to the IRS in 2022 seeking help. Only 7.4 million calls were answered — just over 10 percent — and these had an average wait time of 28 minutes.
The Taxpayer Advocate Service, an independent organization within the IRS established in 1996 to help Americans address federal tax problems, issues an annual report to Congress every January with an assessment of the IRS’s prior-year operations and some legislative recommendations. The recommendations typically include more amendments to the Internal Revenue Code, more IRS rules and rule revisions, more funding from Congress, expanding jurisdiction of the U.S. Tax Court, and more mandates on the private sector, such as establishing new IRS competency standards for tax preparers. Hence, these ongoing annual recommendations, while well-intentioned, only serve to tinker with a massive system already fundamentally broken and beyond repair.
The current American tax system is clearly a dysfunctional labyrinth and an oppressive cost burden on American citizens and businesses. So, how did the United States, a nation founded on liberty and limited government, get to this point? A historical look at the evolution of the American tax system provides the necessary context for understanding the problem and achieving a sensible solution.
The 16th Amendment: A Brief History
Despite a national history predominantly void of income taxes for more than a century, the experience of an income tax being put into actual practice from 1862 through 1872, and again briefly in 1894, caused the American public and its legislative representatives to at least become accustomed to the idea of a federal income tax. But more importantly, the narrow Supreme Court decision in Pollock v. Farmers’ Loan & Trust Co. energized a growing populist and progressive political movement in the United States to push for a graduated federal income tax in the late 1890s and early 1900s.
When Republican President William Howard Taft succeeded progressive Republican President Theodore Roosevelt in 1909, he was under immediate pressure to support a new graduated income tax law. Not only was there widespread bipartisan support for a new income tax on high-income Americans, but Taft’s predecessor Roosevelt had also advocated for it. Taft was lukewarm, at best, about reviving the tax, but he realized it was an issue that he had to face as aggressive efforts by congressional Democrats to legislate new taxes on corporations and wealthy Americans mounted. These efforts included a new income tax proposed by Sen. Joseph Bailey Sr. (D-Texas) that was likely to pass in Congress, as well as proposals by Sen. Norris Brown (R-Neb.) for a new income tax amendment to the Constitution.
Taft was stuck in the middle with conservative Republicans opposing an income tax. He was concerned about its imminent passage in Congress, but he also feared that any new income tax law would meet the same fate as that which was ruled unconstitutional by the Supreme Court in Pollock in 1895. Therefore, Taft strategized with powerful Senate leader Nelson Aldrich (R-R.I.) to propose a new income tax constitutional amendment to stop the pending legislation in Congress. Their plan worked —Congress put the proposed amendment up to vote, and it easily passed on July 12, 1909, by 77–0 vote in the Senate and 318–14 in the House.
It is important to note that Taft, Aldrich, and most conservative Republicans supported the amendment only because they were convinced that it would never be ratified by the states and would, therefore, permanently end the debate over the constitutionality of an income tax. Instead, they watched in dismay as it was ratified by state after state over the next 3.5 years until the required 36th state (three-fourths of the then-48 states) ratified it on Feb. 13, 1913. The 16th Amendment was officially certified as part of the Constitution on Feb. 25, 1913.
Since the politics of a graduated income tax at the time were based on the idea that the wealthiest Americans should share more of their income for the greater good of the nation, the surprising ratification of the 16th Amendment was likely due to the prevailing view among the states that a federal income tax would only be paid by the highest-income Americans.
A Radical Transformation
The language adopted in the 16th Amendment reads as follows:
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
In contrast, the original foundation for taxation in the United States was set forth in Article I, Sections 2 and 8 of the Constitution as follows:
Article I, Section 2: Representatives and direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers.
Article I, Section 8: The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States.
The two key changes in the Constitution’s original language are as follows:
- The words “direct Taxes” were replaced with “taxes on incomes, from whatever source derived”;
- The words “shall be apportioned among the several States” were replaced with “without apportionment among the several States.”
The change from “direct Taxes” to “taxes on incomes, from whatever source derived” opened the door to unlimited taxing authority by Congress. As a consequence, the 16th Amendment radically transformed the United States from a nation founded on personal liberty and property rights to a nation governed by a central power restricted far less by the Constitution — as became apparent very quickly in the years following the adoption of the 16th Amendment.
Less than eight months after the amendment was ratified, Congress passed a new income tax bill that was signed into law by President Woodrow Wilson on Oct. 3, 1913, the Revenue Act of 1913 (the Underwood Tariff Act). The new law imposed seven graduated income tax brackets ranging from a bottom 1 percent rate on a $20,000 income to a top rate of 7 percent on incomes above $500,000. Three years later, in 1916, the number of tax brackets increased from seven to 14 and the top tax rate from 7 percent to 15 percent. By 1918, during the height of the United States’ involvement in World War I, the number of tax brackets had increased to 56 with a top rate of 77 percent.
After the war ended, the federal tax code was little changed from 1919 to 1921 — the 56 tax brackets remained, and the top tax rate only lowered from 77 percent to 73 percent. It is astounding how aggressively — and quickly — Congress used its newly found powers of taxation, enacting dramatic change on American lives through the 16 Amendment in such a short period of time.
In the subsequent decades leading to the present, the income tax brackets have gyrated up and down, with both the bottom and top income tax rates hitting their all-time highs of 23 percent and 94 percent, respectively, in 1944 and 1945 during the final two years of World War II. At present, for the tax-filing year of 2022, the bottom and top income tax rates are 10 percent and 37 percent, respectively, with seven graduated income tax brackets.
When a new federal tax code was implemented with the Revenue Act of 1913, it comprised 27 pages and introduced Form 1040 for taxpayers to report income. The original Form 1040 comprised only four pages, including one page for instructions. The same form was used again in 1914 and 1915. In 1916, Form 1040 was revised and gradually increased in complexity in subsequent years. In 1939, the federal tax laws enacted after adoption of the 16th Amendment were compiled and codified into a new United States legal code, Title 26 of the U.S. Code, or the Internal Revenue Code. This code was amended in 1954 and again in 1986. As mentioned above, the Internal Revenue Code has since expanded to massive proportions, now comprising 6,979 pages.
Failed Attempts to Repair the Labyrinth
Americans’ dissatisfaction with the federal tax system since the adoption of the 16th Amendment has spurred several political movements for change. The most meaningful in the past 50 years was the “Reagan Revolution” of the 1980s, which included two significant tax-reform laws under President Ronald Reagan: the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986.
Reagan’s 1981 law reduced the bottom tax rate from 14 to 11 percent and the top from 70 to 50 percent, but it still maintained 14 tax brackets. His 1986 law reduced the number of brackets to only two, raising the bottom rate to 15 percent and reducing the top to 28 percent. It also changed the official name of the Internal Revenue Code from the “Internal Revenue Code of 1954” to the “Internal Revenue Code of 1986.” While the 1986 law made numerous amendments to the existing 1954 code, it did not substantially recodify or reorganize its basic structure.
In spite of Reagan’s success in 1989 at some simplification of the code, it did not take long for his reforms to be whittled away by succeeding presidents and members of Congress beholden to special interest lobbying groups. President George H.W. Bush signed the Omnibus Budget Reconciliation Act of 1990, which added a top tax rate of 31 percent in 1991. This was followed by President Bill Clinton signing the Omnibus Budget Reconciliation Act of 1993 to add two higher rates of 36 percent and 39.6 percent — on top of the three existing rates.
Both omnibus budget laws reversed some of the reforms enacted in Reagan’s 1986 tax-reform law. This indicated a return to old business as usual — i.e., special interest lobbyists influencing members of Congress for special treatment in the tax code. American taxpayers became more frustrated with the code’s complexity, and efforts renewed in the 1990s to reform the federal tax system.
This increased dissatisfaction is demonstrated in Steve Forbes‘ run for the Republican presidential nomination in 1996 and 2000. A flat income tax was the centerpiece of his campaigns; he proposed a flat rate of 17 percent, with generous personal exemptions of $13,000 per adult taxpayer and $5,000 per child. Although Forbes’ campaigns were unsuccessful, they called attention to the federal tax code as an important issue for the American public.
In 1998, the House of Representatives passed the Tax Code Termination Act, which would have actually terminated the Internal Revenue Code, effective after Dec. 31, 2002, and approved a new, simple, and fair tax system by July 4, 2002. The bill was passed in the House 219–209, but it stalled in the Senate Finance Committee and never received a Senate vote. In 1999, Rep. John Linder (R-Ga.) introduced and co-sponsored a bill to abolish the IRS and replace the federal income tax with “a national sales tax to be administered primarily by the States.” It never received a vote.
An Unpromising 2023 Bid at Reform
The Republican majority in the House of Representatives in the current 118th Congress is considering a new tax-reform bill, the FairTax Act, introduced and co-sponsored by Rep. Buddy Carter (R-Ga.). The proposed bill would abolish the IRS and the Internal Revenue Code and establish a new national sales tax that would be administered by new, much smaller, less costly tax-collection bureaus within the Treasury Department. The bill would eliminate all personal and corporate income taxes, estate taxes, gift taxes, and payroll taxes. The new national sales tax would start at 23 percent, but that would include both the total cost of the sales item and the tax itself, which effectively means a sales tax rate of 30 percent.
The FairTax Act proposed by Carter has received strong criticism from both progressive and conservative think tanks, primarily based on concerns that a national sales tax would be unable to replace the revenue realized by the existing tax system and that it would be regressive in nature, increasing the taxes on lower-income people. It is highly unlikely that the FairTax could be enacted in the current Congress, what with the Democratic-controlled Senate and Democratic President Joe Biden almost certain to oppose it.
The proposed act also calls for a repeal of the 16th Amendment within seven years of the FairTax’s enactment, and failure to repeal the amendment within that time period would result in the end of all provisions of the proposed act in the calendar year following the end of the seven-year period.
A Path Forward
The House Republicans sponsoring the proposed FairTax deserve an A+ for their aspirations to legislate a better federal tax system. However, their plan is simply not politically feasible — at least not any time in the near future. Not only would it not receive any support from Democrats, but it is doubtful whether it would even receive support from Republican Speaker of the House Kevin McCarthy or the majority of House Republicans. The regressivity of the proposed national sales tax presents a difficult political narrative to overcome.
On the other hand, the American public’s dislike of the IRS and the current federal tax system is so strong that there should be a politically feasible path to a simpler, less burdensome federal tax system. In this regard, any congressional reformers of the tax system must assess not only what is most systemically desired but also what is politically possible. A better plan than the currently proposed FairTax would be a dual-track approach with two separate political paths intended to achieve the same desired goal of a simpler, less burdensome, and more efficient federal tax system that also restores Americans’ basic constitutional rights to personal liberty and property.
One path is to continue with an income tax, but only in the form of a simple flat tax for both individual and corporate taxpayers, with generous exemptions on initial, to-be-determined amounts of income. Thereafter, the flat rate would be applied on all income earned beyond the initial exempted amounts. This would address the political problem of regressivity faced with a national sales tax, thereby making it more politically feasible.
This system would be practically the same as the flat-tax plans proposed by Forbes but, in addition, would explicitly require replacing the existing Internal Revenue Code with a simple federal tax code no greater than the length of that established in 1913 — with a Form 1040 comprising a total of only four pages with only one page of instructions.
Such a radically simplified code with a simple flat income tax would provide the necessary political and operational justification for abolishing the IRS. The functions of the current IRS would be reduced enormously, allowing for a simplified tax-collection function to be transferred to a new tax-collection section of the U.S. Treasury Department and requiring a workforce of only a small fraction of the current 80,000-employee IRS.
The second path is to introduce a separate bill for the repeal of the 16th Amendment. This should be a separate legislative effort because repeal of any constitutional amendment would be a much more difficult and lengthy process with an uncertain outcome. Thus, it would be better to keep it separate from the more achievable effort of a simplified flat-tax law that abolishes the IRS and the current code.
However, despite the difficulty, efforts to repeal the 16th Amendment must be supported in order to achieve the ultimate goal of restoring Americans’ original constitutional rights to personal liberty and property.