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IRS to increase “pre-crime” enforcement

April 12, 2011
Vina del Mar, Chile

Did you ever see Minority Report? It’s one of Steven Spielberg’s often forgotten about movies based on the short story by Philip K. Dick. In the movie, pre-couch Tom Cruise plays a police officer in the year 2054 who works for the highly specialized ‘pre-crime’ division.

Using a bizarre array of technology and metaphysics, the pre-crime division sees into the future and stops criminals in their tracks, arresting them before they commit a crime… sometimes before they even think about committing a crime.

This very elaborate and morally ambiguous law enforcement system is predicated on the government determining what your actions and intentions will be, often before you do. It’s not all science fiction.

A number of politicians and bureaucrats in Washington D.C. are seeking to step up the Internal Revenue Service’s powers, and technology, to essentially audit taxpayers before returns are even filed.

In remarks to the National Press Club last week, an IRS spokesman unveiled the agency’s vision for the “look forward” model in which most of the pertinent reporting information for the average taxpayer (W2, 1099, mortgage interest etc.) would be submitted to the IRS well in advance of the individual deadline.

After a massive upgrade in technology, the IRS would be able to pre-calculate what it expects to receive in taxes and instantly reject any return that doesn’t comply with its determination.

This may work fine and well for some wage earners… but start throwing in a few investment accounts, small business income, private partnerships, etc. and things can quickly diverge from the IRS estimates.

Imagine you start a new business on the side of your usual employment this year and take an initial loss due to ancillary startup costs. This wouldn’t factor into the machine’s pre-calculations of your tax liability, so you would be immediately rejected and flagged for additional scrutiny.

Makes you want to run out and start a business, or invest your capital in someone else’s, right? Not exactly.

Deep down, I think these people simply want to try and make things more efficient. Pre-crime is not the way to go. There are a number of countries that have incredibly successful tax codes, and there are common themes in all of them:

1) Keep it short. The Baltic countries are a great example of this– the entire Estonian tax code is about 70 pages, roughly 1/1000th the size of the US tax code (which is still prone to so much interpretation). It takes about 15 minutes to fill out an Estonian return, and you can do it online. In the Maldives, it’s even easier.

2) Keep it simple. When you have a tax code that’s so complex it has given rise to a multi-billion dollar preparation industry, you have a problem. There are dozens of different forms at the IRS, and over 20 versions for the 1099 alone! This is a system that is prone to massive flaws and a great deal of contradiction.

Hong Kong is a great example of a simple system. Taxes are levied at a flat rate of 15% based on the “territorial principal” that only income derived from Hong Kong is taxed. There is no capital gains tax, no VAT, no estate tax, etc. And yet, the biggest problem the Hong Kong government faces regarding taxes is how to give away their massive surplus.

3) Keep it low. When you make it easy and painless for people to pay taxes, it removes most of the incentives for them to cheat. In Singapore, tax rates are among the lowest in the world with a maximum rate of 20%. The capital gains rate is zero. The corporate rate varies from 0% to 17% (and keeps falling).

Under these circumstances, why cheat? By keeping rates low, the government is removing any incentive to engage in complicated (and costly) tax avoidance techniques. From a cost/benefit perspective, it’s much easier to comply when rates are low.

4) Keep it friendly. Creating an adversarial relationship with taxpayers doesn’t do anyone any favors. One of the key themes of the world’s most successful tax regimes is that they do not operate like a police agency that’s out to get people. This is a massive hurdle for the IRS to overcome.

Perhaps the polar opposite of this is Switzerland, where tax evasion is considered a civil matter, not a criminal matter. In Switzerland, the local cantonal tax authorities actually compete with each other for your business, rather than sticking you up for cash under penalty of imprisonment.

The US government is now searching for answers. Behind close doors, politicians are likely admitting to each other that the kitty is empty and they’re completely bankrupt. They don’t have to look far for solutions– the best models in the world are already in practice and have been successfully implemented.

Rather than making things easier, less painful, friendlier, and simpler, the US government seems to be taking the opposite approach– hiring more agents to sniff out ‘suspicious’ activity (defined in their sole discretion), raising taxes, and relying on fear and intimidation.

I suspect this path will have the opposite effect– instead of raising more money for a bankrupt government, it will continue to chase out productive people. More on that in a future letter.

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About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Comments on this entry are closed.

  • http://www.facebook.com/nphyx Justen Ⓐ Robertson

    I go back and forth constantly on whether the U.S. government as a whole is grossly incompetent or intentionally malicious. Stuff like this encourages me to believe it’s a lot of both.

  • Chuck B.

    Good post. I agree. Many western nations now have complex and punitive tax codes. When they find themselves in a postion where they are losing competive ground to other regions or just spending too much, the answer is to pass even tougher laws and force the tax base to comply rather than, like you said, make it easier, more friendly, and more competitive. This this wrong on so many levels. No wonder corporations & entrepreneurs are flocking to regions like Switzerland, Hong Kong, and Singapore.

  • Kevin

    Why are these concepts so difficult for the US Government to understand? They could lower the base tax, simplify, save money and end up generating more income without raising taxes!?

  • http://twitter.com/jimc3 Jim

    As Martin Armstrong said, every government in the past has gone after its own people when confronted with the existential threat of too much debt. We are going to see that here. I expect more Draconian measures to follow. It won’t work, but that is not the point. Our government is run by stupid children.

  • R.

    Cheating on taxes? No such thing. You are not cheating when you try to hide your hard earned money from the thief.
    Of course, they have more guns, so … making it “nicer”, “easier” and with lower tax rates is better than what exists now.

    • mikrat

      Your right on one thing – they are thieves. But they DO NOT have more guns than the people. This is a media induced lie.

      We the people have the weapons – and its past the time to start using them on our real enemies. The FEDERAL RESERVE.

      People need to start reading the Laws instead of just relying on the mass media liars to tell you any truth. The laws are not as hard to understand as the lawyers would have you believe – they just want you to be ignorant and protect there pay-checks.

      The IRS is an agent of the international banksters – Your taxes only go to pay the interest on the national dept – and that can never be paid back.

      • gordy three horses

        and how many nukes, aircraft carriers, drones, and divisions, tanks do you have to stop them with? i’ll guess, a big fat 0. your idea is like drinking a beer in a forrest fire and pissing on it to try to put it out.

  • Elai

    It’s not the US way to be friendly! Almost every interaction internally and externally, from immigration, visa interviews, social security, taxes, medicare, customs, banking, etc is to come from a place of suspicion and a police model of interaction (occasional glass windowed interviews, professional yet anal at best and everything you say is taken down as a statement/confession, no washrooms or cell phones, etc.

  • Peter

    The US government will never improve its practices, and become more like Switzerland in its tax policies. There are too many politicians and corporate thieves skimming from the top to allow that to happen. I just think that some countries have a better sense of moral behavior than others, couples with the winner-take-all attitude in the US (which is getting worse). The best idea is to just leave, as I am.

    • Scout

      Have seen alot of people leaving the US and alot of peolple looking at options.

  • http://www.facebook.com/mwasmuth Mark Wasmuth

    to learn more about how they are making you slaves goto powercrossing com

  • BabyB

    If they have enough people to do this…they have TOO MANY PEOPLE! It is past time for the Fair Tax and the elimination of the IRS in one stroke! Take the crooks out of the middle, eliminate the loopholes and even collect “immoral income” taxes from drug dealers and others…if you have not checked this out please go to: http://www.FairTax.org and educate yourself. It is past time!

  • Guest

    It sure is “strange”, and remarkably understandable when Tax Codes & Taxing philosophies are presented in such a straight forward an simple manner — with real world examples of what works and what doesen’t!

  • Coatzia

    Politicians and Bureaucrats have certainly done a fine job of it so far, havent they. No faith, no faith in our Government what so ever!

  • MV

    Gosh, I’m getting tired of the way the majority of the population think here in America. I have invested a lot of time, effort and money here. Now, all my sacrifices and hardwork don’t seem to matter anymore. The inspiration and hope it once gave people to dream for a better life is completely gone. Now the government itself is encouraging it’s own citizenry to turn and squeal against each other for money!??? That’s grossly immoral!!!What has this country turn into? It’s a shame! I’m very dissapointed! It’s time to call it quits.

    • gordy three horses

      where are you going to run too? you wouldn’t be jewish would you? make a killing and when the laws change not to favor your ilk, just pick up your cash register and leave.

  • Al Sledge

    The people of Hong Kong, the Swiss, and other nations are not “fighting” world wide wars for democracy, humanitarianism, oil, drugs, or whatever excuse one wants to make for our bloated military interventions and justice system. And yes, I fear my own lying government to boot. A pretty sad state of affairs exist here in the “land of the free” where banks are bailed out while millions lose their homes.

  • http://profiles.google.com/jhancockdarwin James Hancock

    Atlas Shrugged opens Friday in theaters…. you just proscribed yet another principle of Rand’s argument.

    And of course the government wants to ban 1984 and Brave New World for the same reasons.

  • Rwolf

    Tax payers will increasingly be forced to hire CPA to counter IRS kicking out their tax returns.

  • Kunsthausmann

    “Keep it friendly.”

    Extortion is friendly?

  • Peasant farmer of 2011

    Reading a book on late 1700s. Shays rebellion was about people loosing their farms with unfair taxes. It never occurred to them to just make the taxes fair, only to kill the rebels. The rebellion of the peasants for the lives of their children worked out better in France, though, until they started exporting the revolution. May history repeat itself.

  • http://pulse.yahoo.com/_63TOYZHUT7MYDMFULR6FKW4KC4 Laws

    Please show me where in the IRC that a citizen living and working within the 50 states is even the subject of the the income tax.

    Why can I not find this in the annotated code under ‘citizen’?

  • http://www.tax-heaven.net/ James

    The Internal Revenue Service is also extending the deadline for truckers and other owners of heavy highway vehicles to file federal highway use tax returns from Aug. 31 to Nov. 30 this year, largely to avoid the potential for multiple filings if the tax, currently set to expire on Sept. 30, gets reinstated or modified by Congress.

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