There is no way to have an honest income tax. As Henry George wrote, the income tax is a tax on honesty. Cheaters gain while honest people lose because they have to pay a higher tax to make up for the nonpayment by cheaters.
The taxing agency must have the power to intrude into people’s finances to check the taxpayer’s honesty and his competence to report all gains. One should not blame the IRS when it listens to telephone calls, reads email messages, checks social media postings, looks at mail envelopes, and audits records, because it is its job to check for cheating.
It is too costly to check all taxpayers and non-payers, so the tax-man has to be selective. The need to discriminate - to investigate one group rather than another - tempts the authorities to exploit their power to favor their friends and punish their enemies.
A value-added or sales tax is also corruptive. To enforce a high sales tax, the authorities need to check the records, and receipts of the sellers, and they also need to invade the privacy of buyers to make sure they have, for all their goods, receipts that disclose the taxes paid.
Any tax based on transactions, whether obtaining income or selling goods, requires an invasion into the privacy of both buyer and seller, including the income payer and the income earner, because the tax tempts both parties to evade the tax.
When income is taxed, the government recognizes that some income consists of transfers rather than payments for services. Therefore there are also taxes on gifts and inheritances. But some transfers are intended to finance activities of social rather than individual benefit, so to promote such activities, the funds received by charities are not subject to income tax. The exemption from income taxation is another temptation to cheat, and therefore government has to impose disclosures, and that then also inevitably tempts the authorities to exploit their power.
It should be no surprise that sometimes the exploitation by the governmental authorities will be so stark that it becomes a scandal. The targeting of conservative groups by the Internal Revenue Service is just the most recent example. The chiefs then have to deny responsibility and refuse to answer questions. The official who initiated the biased screening has not be identified. The response of the tax agency is always to claim that they have not been given enough funds for better enforcement.
To exert power, the taxing agency has to call on other government agencies to bring an army of intruders into the targeted persons. A woman in Texas who founded two public policy groups and sent in applications for tax-exempt status became a target of the FBI; the Bureau of Alcohol, Tobacco, and Firearms; and the Occupational Safety and Health Administration, as well as the IRS. This serves as an example to others that IRS can invoke the full might of the US government
IRS officials say they need to engage this power to do their jobs, which is true. The top officials cannot know all that the underlings are doing. And it would fight human nature to require agents to avoid acting on their biases. The firing of one or two officials will not stop the practice because the structure of the tax system inflicts unstoppable perverse incentives.
Economics tells us that to change outcomes, we must change the incentives. A tax system that minimizes corruption requires that the tax base be based on implicit reality rather than explicit transactions. Adam Smith in the Wealth of Nations
recognized that the implicit reality that is best suited for public revenue is ground rent.
We minimize tax corruption by fully disclosing all tax records. A tax on land rent or land value is based on property prices that are a public record. Today, in the USA, property assessments can be, and often are, available on the web sites of county governments. In a properly-applied land value tax, one can look up any property address and find the assessed value.
Also in a proper land value tax, all land is subject to the tax payment, including land held by nonprofit organizations, including governments. There should be no exceptions. Besides disclosure and universal tax payments, the third element that minimizes bias is the ability to appeal an assessment. If a property owner thinks his property was assessed too high, relative to his neighbors, he can bring the case to an appeal board, and then to a jury.
Land is inherently public. It cannot hide or flee when taxed. One’s wage or business profit or income from savings is inherently private, and should not have to be publicly disclosed. Also the capital goods of your home - the wiring, the plumbing, the paint, the attached appliances, and the quality of the walls, floors, and ceilings, are subject to inspection with a tax on buildings, but irrelevant if only the ground is taxed.
Only a land-value tax has complete privacy for one’s personal finances and complete disclosure of the tax base. We cannot claim that a land value tax is 100 percent free of corruption, because any human institution is imperfect, but utopia is not an option. We can only select the tax base that minimizes evasion, cheating, corruption, and intrusion, and that is land.
The land value tax is based on implicit reality rather than the superficial appearance of transactions. The tax on ground rent or land value is implicit because it is based on the economic rent of land, the highest rent it will fetch, rather than any explicit payment by tenants to landlords. Therefore land value taxation conforms to what economic theory tells us is the best source of public revenue - best for the economy, best for honesty, and best for avoiding tax scandals.
Those who decry the abuse of power by taxing agencies are themselves guilty of helping to cause the problem unless they take their case to its logical conclusion - the replacement of taxes on earned income and produced goods with a tax on land value.