TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, November 30, 2005

Blum on The Flat Tax: A Panacea for Privacy Concerns?

Blum_1Cynthia W. Blum (Rutgers-Newark) has published The Flat Tax:  A Panacea for Privacy Concerns?, 54 Am. U. L. Rev. 1241 (2005).  Here is the Introduction:

Americans prize privacy, particularly from government intrusion, and our Constitution provides fundamental privacy protections....Notwithstanding these Constitutional protections, Congress has found it necessary to authorize the IRS to use mandatory measures to collect a comprehensive body of personal financial information about each American, in order to ensure compliance with the federal income tax. Increasingly, the IRS stores this information in digital form and frequently shares it with other agencies of the federal government and the states. Some commentators view this collection of information by the IRS as an unacceptable invasion of privacy; they urge that privacy be restored to Americans by replacing the income tax with a "flat tax," a form of consumption tax. They emphasize that, under the flat tax, most taxpayers would be required to file only a postcard-sized return, in contrast to the extensive reporting required on the current Form 1040.

President Bush has recently announced his intention to pursue tax reform in his second term and has appointed an advisory panel to examine various options, including adoption of the flat tax. This Article seeks to contribute to the upcoming debate by examining whether the issue of privacy should provide a strong argument in favor of replacing the income tax with a flat tax.

Part I will briefly describe the flat tax, and Part II will consider what changes in IRS information-gathering would occur if a flat tax is adopted. The most salient change is that, under a flat tax, the IRS would no longer routinely collect information about dividends, interest, and capital gains received by taxpayers. Part III will examine whether the IRS's current collection and use of this category of information is, in fact, as dangerous and harmful as flat tax advocates contend. This Part also will examine whether the flat tax would avoid any harms found to occur under the income tax. Next this Part will analyze the difficulties that other government agencies and units would face if the IRS no longer collected and shared this information. In conclusion, this Article notes that dividends, interest, and capital gains are highly concentrated among wealthy taxpayers, so that any improvements in privacy resulting from adoption of the flat tax would be unevenly distributed among Americans. It also concludes that the privacy of Americans would be better served by retention of the income tax and renewed efforts to protect against misuse of the information that the IRS collects.

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