Senator Ted Cruz said "I think we ought to abolish the IRS and instead
move to a simple flat tax where the average American can fill out
taxes on postcard." What are the benefits the supporters of this plan
ascribe to it and what are the drawbacks of the plan in the eyes of
Ted Cruz is being intentionally obtuse when he offers up this slogan. It is a pipe dream that can't meaningfully provide the benefits claimed.
A Simple Flat Tax With "Postcard" Returns Can't Abolish The IRS
First, somebody has to still prepare, receive and process the postcards, which would take a comparable amount of time to processing efiled tax returns. The "postcard tax return" plan, even in its ideal sense, saves money only on the taxpayer side, not on the government side.
Second, the single biggest job of the IRS is forcing people to turn over money to them in cases where people don't pay (even if all taxes are withheld by employers and financial institutions, they have to spend time and money to do the withholding and some government agency has to make sure that they turn over the money they withhold). This job doesn't go away.
Third, another very big job of the IRS is to pursue people who provide inaccurate information or untimely information to the IRS that causes their income to be incorrectly reported. Even if they are relying on "postcard returns" prepared based upon information returns of employers and banks and the like, there will still be mistakes and fraud in information return preparation. If your employer files a tax return saying you make $30,000 a year as Vice President of a 10,000 employee corporation, yet you have an expensive yacht and live in a mansion in NYC, somebody needs to audit the employer's information returns to catch this fraud, or widespread fraud will develop.
Fourth, someone has to make rules regarding what does and doesn't count as income, whether that is the IRS or some replacement agency. Taxable income is an inherently arbitrary concept. It currently takes two thick books of statutes and six thick books of regulations to define it. Tax regulations are like speeches which as Abraham Lincoln, take more effort to make draft in a short version than to draft in a longer version.
So, any effort to abolish the IRS would simply lead to a new agency with precisely the same job with a new name in the same cabinet level department of the United States government (i.e the Treasury Department).
Tax Returns Aren't Complicated By Tax Rates That Aren't Flat
About 97%+ of the work of preparing a tax return involves figuring out what someone's taxable income is and what tax credits they are entitled to, and only 3% or less of the work involves figuring out how much tax is owed based upon that taxable income. The more income someone earns, the smaller a proportion of the tax preparation time and tax return processing time goes into applying the tax rate to the person's taxable income. Most people just take taxable income and look it up in a table that comes with the form without doing any math at all.
Also, calculating the tax due is already optional; you can already elect to let the IRS do that final step for you, if you want.
A flat rate primarily leads to redistribution of wealth from low income earners to high income earners, by making the tax system less progressive, but since the progressive marginal tax rate structure is not the source of complexity in preparing income tax returns, eliminating progressive marginal tax rates won't make the tax system any simpler.
Taxing all kinds of income at the same rate, rather than providing favorable tax rates for some kinds of income (e.g. corporate profits, long term capital gains, and qualified dividends), can sometimes make the tax system as a whole simpler by eliminating artificial tax incentives to turn income that would be taxed at an unfavorable tax rate into income that is taxed at a favorable tax rate through planning the way that businesses and business transactions are set up for tax purposes.
But, the proposal of Ted Cruz and similar U.S. flat tax reformers isn't truly a flat rate system, he actually proposes taxing lots of kinds of investment income at a zero percent rate and earned wage and salary income at a flat rate. So, the need to police arbitrage between different tax rates continues to exist in his plan.
In contrast, limiting progressive marginal tax rates on some kinds of income doesn't meaningfully add to the tax planning problem or make taxation more complex.
There Is Some Irreducible Complexity In Any Income Tax
The taxation of wage and salary earners could be made somewhat simpler by having the IRS send out a presumptive tax return to people (based upon employer prepared W-2s send to the IRS and 1099s from financial institutions sent to the IRS) with few if any deductions or credits. But, for people who take the Standard Deduction (most working class and most middle class families who rent their homes), preparing a tax return is already quite simple, and the credits that make their taxes simpler mostly benefit them and involve only a little more information. A reform of this kind has a strong likelihood of increasing the total tax burden on the low income taxpayers with the least discretionary income.
On the other hand, most of the time and complexity of preparing tax returns for business owners and other self-employed people comes from gathering up lots of information on revenue received and expenses paid to determine profits which are the starting point for determining taxable income. But, it is basically impossible to have an income tax on self-employed people and businesses that doesn't require people to collect, summarize and report this information to a tax collection agency which in turn has the power to audit returns to see if they have omitted income or included expenses that aren't legitimate expenses.
Similarly, you need rules to tell you went to count particular items of revenue towards income and when to count particular expenses, and someone has to write those rules and enforce them.
Caveat: Tax Simplification Is Still A Worthy Cause
This isn't to say that there is anything wrong, in principle, with finding ways to actually simplify income taxation, or to find ways to reduce tax preparation burdens on taxpayers.
The U.S. certainly doesn't have the simplest or least burdensome of all possible income tax systems, and simplification can often also reduce opportunities for tax evasion. For example, even within the U.S., the FICA tax system of the United States has much lower collection costs per dollar of revenue raised than the ordinary federal income tax system.
But, no amount of tax simplification can eliminate the need for the IRS or an equivalent agency with a new name, and the kind of steps needed to simplify the tax code involve thousands of little complexities that need to be unraveled one by one in detail, not steps that can be taken in one fell swoop without bankrupting the federal government by eliminating almost all of its income tax revenues (something that even Ted Cruz does not support). It might be possible to make the IRS and the Tax Code a little smaller, but it can't simply be eliminated.
Furthermore, the vast majority of true tax simplifications involve reducing barriers to getting tax breaks for the poor and middle class (like simplifying the earned income tax credit and Obamacare Premium Tax Credit) while removing loopholes and credits for businesses and affluent individuals (e.g. removing the complex R&D tax credit and the new passthrough taxation credit which are wildly complex). This is something that Ted Cruz and his supporters would almost certainly oppose in practice.