Taxing Choices - (simplifying federal tax code to a 19% flat tax?)

As April 15 arrives, millions of Americans greet this black-letter date as cheerfully as school kids lining up for vaccine injections. Once again, this will hurt.

President Bush’s bipartisan tax-reform commission should endorse a powerfully simple idea that would ease the pain of many taxpayers: Let Americans choose between today’s tax system and a 19-percent flat tax.

For now, Americans contend with a federal tax code that has grown luxuriant after ten years of Republican congressional dominance. As Cato Institute tax analyst Chris Edwards reports, federal tax rules that filled 40,500 pages in 1995 stretch to 60,044 pages today. A decade ago, 50 percent of Americans hired tax professionals; at least 62 percent do so now.

Last year, Americans spent 6.5 billion hours wading through the 529 different tax forms the IRS scrutinizes. Completing the standard 1040 tax return and Schedules A, B, and D required 21.2 hours on average in 1995, compared with 28.5 hours in 2004; painting Uncle Sam a numerical portrait of one’s finances typically requires more than 3.5 work shifts. Add this temporal insult to the economic injury of sending the Treasury money atop this mind-numbing paperwork.

Tax compliance will cost U.S. individuals, businesses, and non-profits at least $223.7 billion this year, the Tax Foundation estimates. Every dime of this fortune could be employed more productively in the stock market or any home-loan agency. Economists call this “deadweight loss.” Regular folks call this “cash down the toilet.”

Still, for some people, this fetid whirlpool has value. The home-mortgage deduction, business entertainment expenses, and other write-offs make today’s structure grimly appealing to some filers. If they like the tax code, let them have it.

Steve Moore agrees. The president of the Washington-based Free Enterprise Fund (and NRO-er) wants Americans to decide how to pay taxes. His Freedom to Choose Flat Tax plan would allow Americans who prefer today’s tax code to file under it. Those who don’t could submit postcard-sized returns and pay a 19-percent flat income tax with no deductions beyond personal and dependents’ exemptions.

For individuals and companies, once you go flat, you don’t go back. All exits from today’s system are final.

Businesses would pay 19 percent with no deductions beyond immediate amortization of capital purchases. Stupefying depreciation tables would be relegated to Karl Marx’s Museum of Antiquities.

If you fear outsourcing employment, insource capital. A 19-percent corporate tax would help U.S. companies attract job-making foreign investment as Germany, Poland, Slovakia, and other European nations slash business levies below 20 percent. America’s 35-percent corporate tax — the industrialized world’s highest — currently exports domestic funds and repels international cash.

How does Moore “pay for” a plan that “lowers tax rates to 19 percent,” as he describes it? “This effective rate cut will cause a burst of growth in work, investment, and job creation. This dynamic pro-growth impact dramatically will increase tax receipts.”

Tax-cut skeptics might scoff at Moore’s faith in the supply-side tenet that tax relief finances itself by stimulating economic activity and yielding higher tax revenues and lower public-assistance outlays as the unemployed return to work. This is exactly the prediction of David Malpass, chief economist with Bear, Stearns & Co., Inc. (he's another NRO contributor).

The 2003 tax cut “was scored as a big loser for Washington, $100 billion per year for ten years,” says Malpass, a Reagan administration deputy assistant Treasury secretary. “But it turned out to be a big winner for the nation, helping generate $2 trillion in stock-market gains almost immediately, plus steady 4 percent economic growth and 2.2 million new jobs in 2004. It also contributed to the $180 billion-per-year surge in tax receipts. That’s a phenomenal return on investment. The Freedom to Choose Flat Tax would score the same way — big budget losses assumed inside the Beltway, but really big gains for the nation if it actually were enacted.”

“I think this is a great idea,” says Steve Forbes, CEO of Forbes, Inc. The New York publisher popularized the flat tax in his 1996 and 2000 Republican presidential campaigns. “People always focus on what you’re going to lose. You know what you’ll lose, but the gains don’t really register. When I ran, people were much more open to the idea that they could see for themselves which system would be better. That way, they would not see politicians pull a fast one, take away their deductions, and sock them with higher taxes. That line always got a big hand.” (Full disclosure: I was a Forbes 2000 communications consultant.)

Meanwhile, Bush’s tax-reform commission is reportedly evaluating a consumption tax. Georgia Rep. John Linder’s proposal would padlock the IRS. After early applause, the details in Linder’s bill should muffle that ovation.

Linder would launch a 23-percent national sales tax. Coupled with state and local sales taxes, New Yorkers, for example, would take a 31.75 percent tax hit on every retail purchase. Such exorbitant rates would lead millions down a dark alley into the black market. Revenue shortfalls would prompt calls for an even higher sales tax. This could devolve into an opaque, paperwork-intensive, European-style value-added tax (VAT). As Americans for Tax Reform president Grover Norquist warns: “‘VAT’ is a French word for big government.”

Today’s tax code need not be buried so much as transcended. Americans already choose between Fannie Mae and Ditech.com, PBS and A&E, and the post office and FedEx. Why not pick either the tax code or the optional flat tax? Let the sentinels of the status quo argue against granting Americans this basic freedom.

George W. Bush wants to offer younger Americans the opportunity to remain in the Depression-era Social Security system or voluntarily open 21st-century personal retirement accounts. He also should make Steve Moore’s tax-reform proposal his own. President Bush is welcome to this slogan: “It’s your tax return. It’s your choice.”

Deroy Murdock is a New York–based columnist with the Scripps Howard News Service and a senior fellow with the Atlas Economic Research Foundation in Arlington, Virginia.

"The Fedlgumt controls behavior through the tax code; they won't give that up easily."

Unfortunately, I think that you're right. However, as with other issues in the past, perhaps if there were a groundswell of public demand for a 19% flat tax, including political pressure on elected officials to create this option, it might be enacted.

BTW.......I love your FR user name! "Great Prophet Zarquon!!" Anyone who thought up such a name should be sent as leader of a Special Ops team to capture and dispatch Al-Zarkawi, once and for all. An advance team of our guys could drop leaflets all over the areas where Zarkawi is known to be hiding out - announcing, "Beware! Great Prophet Zarquon is coming to get you, Al-Zarkawi! The game is over. Turn yourself in, or suffer the steaming wrath of Great Prophet Zarquon!!!"

HA!

Char :)

Let Americans choose between today’s tax system and a 19-percent flat tax.

Well at my "married filing jointly" $83000.00 income. I figure my taxes would probably go up.

But ultimately it would depend on the amount I spend (as opposed to the amount I save/invest). At least the flat tax system would incentivize investing and saving.

Flat tax will never see the light of day. The feds have seen a movement like this coming and have installed a roadblock. That roadblock is all the people who are living off the government and depend on the government for their income. It is a tremendous voting bloc. Between them, those who don't make enough to pay taxes and those who itemize to the point that they might as well not pay any taxes you can rest assured that any movement to go flat tax is flat out going to lose and lose big. Now if Congress wants to make the change without the approval of the people, they may stand a chance but I don't believe it will happen.

But ultimately it would depend on the amount I spend (as opposed to the amount I save/invest). At least the flat tax system would incentivize investing and saving.

A flat tax would just reduce the tax burden on higher-income individuals (and, of course, businesses). It wouldn't incentivize anything, really, and I'd probably be worse off under a 19% flat tax unless it was inclusive of FICA, Medicare, etc.

You may be thinking of the Fair Tax, which is the national retail sales tax the author mentioned but appears not to understand fully. Under that system, you would control 100% how much tax you paid and saving and investing really would be incentivized. It really is just a brilliant plan; I have never read an argument against it made by anyone who understands it. If a 19% flat tax would kick the economy into high gear, the Fair Tax would light rocket boosters under it and launch it into the stratosphere :-p

As a personal goad to yourself, and if you want to stay stoked, deliberately reduce your deductions from your W-4, enough so you actually have to pay a balance with your tax filing. This really serves two purposes. One, the amount of the interest-free loan you make to the Federal Treasury each year is reduced, in this case to nothing, and you enjoy the use of a little more of your own money for a little longer, without seriously handicapping yourself, by holding off remitting the difference until right up to the deadline. Two, you stay on focus in demanding REAL tax reform. But don't play chicken too closely.

Today is a busy day for the Post office. Unfortunately at my P.O. they had two clerks working although they could work four at the counter. Nice long lines as usual.

Neither DeathoCrats or Republicans want any changes that simplify the tax code. Why?

1. DeathoCrats count on getting votes from their base by promising redistribution of wealth via taxes, hurting the nasty Republican corporations via taxes, etc., etc..

2. Republicans count on getting votes from their base by promising to lower the tax burden via income tax cuts, by promising to simplify the tax code (yeah right!), etc.

Simplifying the code, going flat tax, fair tax, etc., takes away from both parties a major campaign issue and politicians will never go for that!

Besides, even IF Republicans wanted to go this route, they do not have the gut, backbone, 'nads to do it!

I do like the idea of having a choice. I think that would result in most people moving to the flat tax rate. Many people spend an enormous amount keeping records, paying accountants, and spending money in ways that they wouldn't really want to do, just to keep the tax collectors at bay.
Flat taxes have worked everywhere they've been tried (I think Ireland and Russia are two places). But if we have to offer people a choice to get there, it could be a really good idea.

Flat tax will never see the light of day. We already have it, it is called the alternative minimum tax.

Whoopee. Sounds like something out of star wars and worse than what we have now. In General The alternative minimum tax affects a small but growing percentage of taxpayers. When it applies, the cost can be substantial. What's worse, this tax is so complicated that it's often difficult to predict when it will apply. Also, it's often necessary to do AMT calculations even in years when the AMT doesn't apply.

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