The Honor System

No one touched on what could be the most significant change of all —a change that may very well determine what kind of civil liberties we pass on to our children in the twenty-first century. I am referring to our income tax system. How a nation taxes—who is taxed, what is taxed, and how taxes are assessed, collected, and spent-will tell you more about that nation than anything else.

In 1954 our income tax was on an honor system. In my first audit as a tax lawyer, a veteran IRS agent started with these words, which have stayed in my mind ever since: “Ours is an honor system,” he said, “which is the only way it will work in a free society.” I don’t know if that was his personal approach or if it was recommended IRS policy. But at that time the only information reporting on taxpayers was the W-2, which enabled wage earners to claim a refund at the end of the year.

Today everything of any possible tax significance is reported to the tax-man: interest, dividends, royalties, part-time work, baby sitters, all stock transactions—and finally, most ominous of all, the photocopying of everything going through your bank account. The 1954 honor system is gone and has been replaced with a spy system without parallel in Western civilization.