In a 4/10/09 WSJ op-ed, Nina Olson, the national taxpayer advocate at the IRS, presents her case for a simpler tax code.

Her office estimates that taxpayers and businesses spend 7.6 billion hours complying with IRS tax code. This does not include state and city tax codes. That amount of hours would make tax compliance one of the largest in the U.S., requiring 3.8 million full-time workers.

Her office calculates that taxpayers spend the dollar equivalent of 14% of the income tax collected to meet tax code requirements.

Her recommendations as guiding principles for tax reform:
Don’t create traps for the unwary.
Simple enough that a single form can be used to report tax liability.
Anticipate areas of non-compliance and make it less inviting.
Some choices, but too many are confusing.
Refundable credits should be simpler to understand, apply for and administer.
Incorporate a periodic review of the tax code.

I have a better idea. No Federal income taxes. Politicians are wanna be car mechanics. As long as they breathe, they will want to amend the tax laws in order to “fix” something.

If there are no income taxes, how to replace the $1.4T – $1.5T in personal and corporate income taxes? Tax stock and bond trades.

In the five day period ending 2/18/09, daily average total notational volume was $229B on 10 million shares traded per BATS. This volume included the Chicago Options Exchange, NYSE, Nasdaq, Boston Exchange, International Stock Exchange. That is $229B traded in one day. 1/2 of 1% (.005) of that trading volume would be $1.145B. There were 250 trading days in 2008 = $1.145B per day * 250 days = $286B. For an individual making a $10,000 stock purchase, that would be a $50 fee.

The volume of bonds sold dwarfs that of the stock market. Construct a smaller percentage fee structure for the bond market. Financial institutions who buy and sell securities with the savings deposits of their customers would pass the cost on to their customers in the form of lower interest returns. Those institutions who traded less would incur less cost and theoretically be able to offer their customers a slightly higher return.

While there will always be the issue of non-compliance, the problem will be greatly reduced, thereby enhancing revenues. Inevitably, there will be investment banks who will construct legal dodges but the IRS should be able to deal with these much more straightforwardly than they currently do with the complexity of the tax code.

Under this simple system, we would implicitly be taxing those who have more than others. That is essentially what this country does with all the complexity of its tax code. Let’s admit it and at least make it simple.