America’s current tax system, another example of government run amuck, is generally perceived as unfair, overly complex, full of loopholes and desperately in need of a major overhaul. Yet, as with campaign finance reform and a host of other important issues, our elected representatives seem impotent and/or lacking the political will to affect needed reforms.
Aside from incomprehensible rules defying even tax experts, our current “progressive” tax code has institutionalized a philosophy which runs contrary to one of our government’s most fundamental responsibilities, that of providing “equal protection under the law”. The social engineering technique of imposing higher tax rates on those who earn more also reflects a failure to comprehend that while our laws guaranty equal opportunity there is no guaranty, nor should there be, of equality or results.
Equally disturbing, the present system has provided fertile ground for massive abuses whereby politicians votes on tax regulations continue to be bought and sold to constituencies of special interest groups, particularly those with access to and whose largess helps finance their political ambitions. The result is the largest, most convoluted tax code in the history of mankind!
Rather than addressing its short-comings and ensuring constitutional fairness, short-sighted tax policies continue to result in little more than a thinly-veiled approach to redistribute the nation’s wealth while perpetuating loopholes which shelter hundreds of millions of dollars at the expense of average taxpayers. Pandering to the frustration and jealousies of lower and middle class taxpayers, politicians seeking votes invariably preach the gospel of taxing the rich and providing middle class tax cuts. As with many beltway prescriptions, inequitable and self-serving legislation has fostered increased social divisiveness and class warfare at the expense of providing responsible leadership.
Rather, in a display of token foolishness, the GOP has contrived a solution, scrapping both the tax system and the IRS on December 31st 2001 absent a consensus on a coherent proposal to replace either. While the IRS’s sometimes Gestapo-like tactics have earned them the enmity of the majority of Americans, the real culprits, those who have authorized both the existing tax code and, by acquiescence, the policies employed by the IRS, sit on Capitol Hill. With this bill effectively “dead on arrival”, another attempt at reform is likely to be squandered.
Simply put, a dramatic overhaul of the tax code is urgently needed, one which eliminates favoritism and guaranties:
Fairness – treating all taxpayers evenhandedly, while providing a safety net for the needy
Simplicity – short, coherent and easily understandable;
Cost-effectiveness – permitting tax calculations without accountants or tax attorneys; and
Efficiency – capable of providing the requisite revenues to finance the annual federal budget.
Presently, three competing proposals capture the essence of the serious debate on tax reform:
The Administration’s “fix the current system” approach.
Louisiana Congressman Billy Tauzin’s national sales or value-added-tax.
A flat rate tax being promoted by presidential wannabe Steve Forbes.
The appeal of President Clinton’s proposal is people’s general adversity to change. By maintaining the current system, which he promises can be fixed, the centerpiece of the current system, the forcible redistribution of America’s wealth remains in place. Moreover, after placating the special interests, any changes are apt to be little more than cosmetic.
A value-added-tax, used by several other nations, places the burden of paying taxes on each step in the production and distribution of goods and services consumed by both businesses and consumers. While all but eliminating the need for filing individuals tax returns, such a tax will place an enormous and costly administrative burden on businesses; the price tag for which will ultimately be passed on to consumers in the form of higher prices. More important, such a tax could be excessively regressive for those basic necessities having a high value-added content.
A flat tax, the central theme of Steve Forbes’ continuing quest for the Republican presidential nomination, is not a new proposal. It has been reviled and skewered by liberals as favoring the rich, as well as ridiculed and unceremoniously rejected out-of-hand by other defenders of the status quo including assorted social engineers pursuing their own private agendas and multitudes of accountants, tax attorneys, government bureaucrats and politicians whose livelihood is dependent on the current tax system.
More reasoned criticisms have been raised by individuals and organizations whose critiques are based on such laudable ends as keeping America economically vibrant and providing a safety net for those at the bottom of the economic scale.
Yet, a well-conceived flat tax program is capable of addressing such concerns and still applying constitutional fairness to all taxpayers. Highlights of such a revised tax code should incorporate the following:
All income, regardless of source, would be included in the taxpayer’s gross calculation
Sole Exception: Interest on individual savings and retirement accounts would be excluded. Only in America are savings taxed!
All taxpayers would be taxed at the same rate irrespective of income level, thereby eliminating the constitutional inequity inherent in the present progressive tax structure. Thus, people with higher incomes will pay higher taxes!
Sole Exception: For every 12 months a qualified investment in a United States business is held, the effective tax rate paid on the capital gain would be reduced by one percent up to 50% of the effective flat tax rate at the time the investment is sold. Admittedly controversial, it will incentivize investors, large and small, to provide the long-term investment and risk capital essential to American businesses to create jobs and remain competitive in increasingly contested domestic and foreign markets.
Phase out all deductions including the home mortgage interest loophole. Despite apocalyptic rhetoric to the contrary, nearly all lower and middle class homeowners will pay substantially less taxes than under the current system.
Sole Exception: Retain the exemption for charitable donations as they provide vital health, social and recreational benefits to our society and are invariably used far more efficiently than when government intervention and subsidies are involved.
Provide a safety net for individuals and/or families whose gross incomes fall below annually adjusted “poverty-levels”. Such individuals/families would not only pay no income tax … but be reimbursed by the government from tax revenues to bring their incomes up to the poverty level. This would concurrently eliminate the plethora of inefficient and costly welfare programs as well as their bloated bureaucracies.
Eliminate all other hidden costs and fees, other than “true” user fees.
Several credible studies suggest a flat tax rate between 15% and 22% would net the U.S. Treasury billions more than it currently collects with significantly less costly and bureaucratic overhead. Payroll administration costs for businesses would be drastically cut. Most importantly, with simplified tax preparation, vastly reduced documentation and lower taxes for most individuals, it is fair to assume compliance would increase.
Further, a flat tax can facilitate the budgeting process and, when necessary, the rate can be adjusted to compensate for changes in government spending patterns. More importantly, it will be more difficult for Congress to hide pork and other inappropriate spending.
Our nation’s Constitution, together with its twenty-seven amendments, contain only 7,675 words. Yet, it has provided a political framework for freedom, liberty and opportunity which have, for more than two centuries, remained the envy of mankind. It is difficult to conceive America’s tax code can’t be captured in far fewer words and provide the same measure of fairness and equal protection for all.
Given a chance, a flat rate tax system can provide fairness, compassion, enable taxpayers to complete their own tax returns quickly and without cost, incentivize private-sector economic growth and provide greater opportunities for Americans. The missing ingredients are elected politicians with the courage and will to bring about change. Their failure do so should be treated no less that fervor than our nation’s Founding Fathers used in dealing with George III.
