Taxes & Spending

Get Serious About Tax Reform

Tax bills enacted over the past five years have reduced the tax-bite for millions of Americans, but they’ve also make the tax code more mind-bogglingly complex than ever. A recent Cato Institute study found that the number of pages of federal tax rules leapt from 26,300 in 1984 to 40,500 in 1995 to a staggering 66,498 in 2006. That’s 50 times the length of the King James Bible, and about 150 times the length of the Da Vinci Code.
 
The massive corpus of income tax rules takes a beating around this time every year from the hard-working public, opinion writers, political pundits, and talking heads on the news channels—and it is well deserved. The Tax Foundation estimates that in 2005, Americans wasted a stunning $265 billion just on complying with the tax code, more than double the compliance costs as recently as 1995.
 
Last year’s tax reform panel lacked the imagination to tear this monstrosity out by its roots and create an efficient, pro-growth system that taxes the proper consumption tax base once, and at a flat rate. If somehow the political will can be found in the administration or on Capitol Hill to make a push for real, fundamental tax reform, American taxpayers have much to gain.
 
All the corporate loopholes, deductions, evasions, shelters, safe-housing and off-shoring would cease to exist. Striking down taxes on capital gains, estates, and retirement benefits, a simplified tax system would stimulate greater economic growth. The tax rate cuts of Kennedy, Reagan, Clinton and Bush proved that flatter marginal rates spur greater investment and economic growth. Fundamental tax reform would be rocket fuel for the U.S. economy. Harvard’s Dale Jorgensen has calculated that flat-rate consumption taxation would boost annual economic growth by a stunning 10 to 12 percent.
 
The easiest way to achieve this could be to implement an idea proposed last year by Stephen Moore of the Wall Street Journal: an optional flat-rate consumed income tax. Earned income would be taxed at a flat-rate for those opted into the system, while anyone who wanted to keep the headaches of the current convoluted tax code would be free to stay. Once taxpayers opted into the flat system, there would be no going back, and eventually most taxpayers would switch.
 
Some tax reform advocates would go even further, scrapping the income tax entirely, banishing the IRS into the history books, and instituting a national sales tax instead. You would pay for government at the cash register every time you made a purchase, and April 15th would be just another day. There is a strong body of research supporting this approach, but it has always had difficulty gaining political momentum, due to misperceptions that the tax rate at the register would be too high, spurring a black market or angering voters.
 
Sen. Jim DeMint (R.-S.C.), introduced ingenious legislation to solve this political problem with an economic equivalent to the national sales tax that could be more politically salable. The DeMint bill, S. 1921, would repeal the individual income tax, the corporate income tax, the estate tax, and the gift tax and replace them with an 8.4 percent national sales tax and an 8.4 percent business transfer tax.
 
Any one of these reforms—a flat-rate consumed income tax, a national sales tax, or a hybrid sales tax/business tax—would be a dramatic improvement over the current tax code for fairness and economic growth. If this is the case, why are we still stuck with the monstrous internal revenue code?  Unfortunately politicians find it much easier to maintain the status quo than to effect real change. The tax code, the economy, and all Americans would benefit if our politicians would find the courage to get out of the mud and engage in a real, informed debate on scrapping today’s tangled federal tax regulations. The only thing simple about the current tax code is how obvious it is that we can do better.

A version of this piece originally appeared in the New York Sun.


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