WASHINGTON — Pity poor former Senators Connie Mack and John Breaux. In January, at the behest of President Bush, they set out with seven other good citizens on a thankless mission that will ultimately prove to be fruitless. The nine make up the President’s Advisory Panel on Federal Tax Reform. They are trying to make sense of the senseless — that is, the federal tax code, a pack rat’s nest of confusing rules, credits, deductions, exemptions, and impenetrable language.
The tax code, all nine million words of it, is annually encrusted with new complications arising from Congress’s endless effort to achieve this or that social goal, usually under the rubric of “fairness.” The Mack-Breaux panel is following in this tradition. The other day it sent up some trial balloons. Worried that mortgage interest deductions without a ceiling were prompting affluent taxpayers to build bigger and bigger homes, they said they might recommend “capping” the amount one can deduct. They also talked of capping the amount-per-employee an employer can deduct for health care premiums.
With a little over two weeks to go before it is to submit its final recommendations, the panel sent up some other trial balloons. Its members like the idea of expanding deductions for charitable donations and getting rid of the odious and misnamed Alternative Minimum Tax (actually it is the Alternative Maximum Tax) which traps more middle-class earners each year. Mindful, however, that its recommendations should be “revenue-neutral,” the panel also is tinkering with the idea of recommending a Value Added Tax. These are popular with some European governments because consumers are inured to them and they are relatively easy to increase. The VAT would be a brand new source of revenue for the U.S. Treasury.
Although the panel’s charge was to find ways to “simplify” the federal tax code, it cannot be done. It is too large, complex, and confusing. The panel’s report will no doubt consist of a collection of on-the-one-hand-this-on-the-other-hand-that recommendations that will do nothing to make the tax code either simpler or fairer. To the extent Congress takes up any of them for debate, the only winners will be lobbyists for the interests most likely to be affected.
WHAT SHOULD HAPPEN INSTEAD is that we should toss the federal tax code into the dustbin, along with the Internal Revenue Service. There is only one way to do that: Adopt a flat tax. As publisher Steve Forbes points out in a new book, Flat Tax Revolution, you’d be able to do your annual filing on a postcard, instead of wrestling with forms, endless dense instructions, or paying a professional to do it for you.
The proposal is clear and direct. A family of four making from $46,165 (after taking a standard $13,200 exemption for each adult) would pay a flat 17 percent on income. Present deductions would be gone, but so would double taxation of dividends, taxation of Social Security benefits, and the Alternative Minimum Tax.
Tax compliance would go up (it has in every country that has adopted the system), and its annual cost of $200 billion would be gone with the wind.
The Mack-Breaux panel may not have been paying attention, but the world is going flat. The move got its greatest impetus from former Iron Curtain countries. Russia adopted it nearly three years ago. The Wall Street Journal reports that Russia “…now gets more revenues from the rich from its 13% flat tax than from its pre-existing Swiss cheese tax code with massive evasion and 50%-plus tax rates.”
Estonia, Georgia, Hong Kong, Latvia, Lithuania, Romania, Serbia, Slovakia, and Ukraine are all on the flat-tax bandwagon and reporting similar results. Greece is the first EU-NATO country to consider it and is expected to adopt it early next year. Even in Britain, France, and Germany, politicians and policy makers are discussing and debating it.
Critics on the left trot out hoary class-warfare arguments against the flat tax. It won’t help the poor. Yet, the flat tax will drop off the rolls a larger group of low-income citizens than ever before. It will only benefit the “rich,” they say. Yet, as the U.S. has proved each time it has made significant cuts in high marginal tax rates, more money comes out of shelters and into investments, resulting in more, not less, money for the Treasury. The economic forecasters Steve Forbes used when he wrote Flat Tax Revolution demonstrated that a flat tax would produce $6 trillion of new assets within 10 years and $892 billion in new payroll taxes.
Inexplicably, there was not a word about the flat tax in the “reform” panel’s announcement the other day.
“The road to Hell is paved with good intentions,” my late mother used to say. If the federal tax code represents Hell on earth, the President’s Advisory Panel on Federal Tax Reform is headed straight for it.
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