Time to Act on the Lessons of History (Tax Reform)

With the agony of filing federal tax returns once again behind us, it is useful to recall the words of the famous German philosopher, Georg Wilhelm Friedrich Hegel: "What experience and history teach is this -- that people and governments never learned anything from history, or acted on principles deduced from it."

April 15, tax day, is probably the most dreaded day of the year for most Americans, as well it should be. The U.S. tax code is a booby-trapped, Kafkaesque maze into which only the brave, or the very foolish, would dare to venture voluntarily. Yet our government plunges each of us by force into this dark labyrinth every year. In 1995, the National Commission on Economic Growth and Tax Reform, on which I served as chairman, took a look at this mess and concluded that "The present tax system is beyond repair -- it is impossibly complex, outrageously expensive, overly intrusive, economically destructive and manifestly unfair."

Here we are seven years later and no closer than we were then to overhauling this dysfunctional tax system. Our political leaders have forgotten the lessons learned repeatedly throughout our history, that people work, save and invest based on their after-tax income and rate of return. If we cut tax rates and increase the after-tax rate of return, people will engage in more productive activities. With rising after-tax returns, every productive force in the economy responds immediately and powerfully to take advantage of the new opportunity to profit from work, saving, innovation, risk-taking and investment.

Not only have our elected leaders been unwilling to learn these tax-reform lessons of history, they have also ignored a wealth of empirical evidence on the success of tax reform in other countries -- Russia, of all places, first and foremost. In the heart of the former Soviet Union -- the "Evil Empire" -- the Russian people transcended Communism and in the process discarded its tax code onto the ash heap of history. In its place, Russia has adopted a 13 percent flat tax. Since its inception just one year ago, the Russian tax reforms have been a smashing success. Not only did the economy grow by more than 5 percent; tax revenues swelled by 28 percent.

The Russians took only a decade to replace their 20th century socialist tax code with a pro-growth 21st century tax code. Meanwhile, America remains stuck with an archaic 45,000-page confiscatory and anti-growth tax code that has not been reformed in any meaningful way for almost 20 years and that is truly unworthy of a civilized society.

Three times in our own history, significant pro-growth tax reform has been enacted, and each time the reforms worked to improve the economy dramatically. In the 1920s, under President Calvin Coolidge, tax rates were lowered to 25 percent from the confiscatory rate of 73 percent they had reached during World War I. In 1963, Congress enacted the series of tax-rate reductions proposed by President John F. Kennedy, which brought the top tax rate down by more than 20 percent. In both instances the tax-rate reductions preceded a new era of economic growth, with the economy growing on average more than 5 percent.

The next significant period of tax reform and economic growth acceleration began in 1978, when Congress passed the Steiger Amendment, cutting the tax rate on capital gains from 49 percent to 28 percent. In 1981, President Ronald Reagan convinced Congress to cut the top rate from 70 percent to 50 percent and then to 28 percent in 1986. After growing at an average annual rate of only 1.6 percent between 1973 and 1982, the economy grew at more than 3.5 percent a year between 1983, when the tax cuts became fully effective, and 1990, when tax rates were raised again.

History also demonstrates that tax reform and lower tax rates do not benefit upper-income individuals at the expense of the poor and the middle class. During the 1920s, the share of the tax burden paid by the so-called "rich" (incomes over $50,000) rose dramatically, climbing from 44.2 percent in 1921 to 78.4 percent in 1928. The share of the income tax burden borne by the "rich" also increased in the 1960s, with the portion of the income tax burden on taxpayers with incomes in excess of $50,000 increasing from 11.6 percent to 15.1 percent. After the 1981 rate reductions, the share of income taxes paid by the top 10 percent of earners jumped significantly, climbing from 48 percent to 57.2 percent in 1988. The share of the income tax bill paid by the top 1 percent rose even more dramatically, from 17.6 percent in 1981 to 27.5 percent in 1988.

Nations around the world -- from Hong Kong and Singapore to Russia, Ireland, Bermuda, Lithuania, Latvia and Estonia -- are reaping the benefits of reformed tax systems with lower rates and more neutral taxation of work, saving and investment. It's time to apply the lessons from our past and to draw on the lessons from abroad to reform our tax system.

Will this be the time we finally act on the lessons of history and of our time? We have a good horse to ride: the Fair Tax Act (HR 2525). Repeal the income taxes, the payroll taxes, and estate and gift taxes. Impose a national sales tax of 23 cents of each dollar spent for new goods and services for consumption. Untax the poor and graduate the effective rate of taxation by rebating in advance monthly to every household the amount of sales the amount of sales taxes payable on purchases up to the poverty level of spending. Research shows this tax system would lower producer prices of goods 20% to 30% in the first year alone. Service prices would drop 25%. Exports would boom. Investment in U. S. manufacturing facilities would soar. Everyone would get 100% of compensation on the paycheck. No personal tax returns. No complexity. No cost of compliance. No IRS chasing individuals. No tax cheating through the cash economy. Check it out: www.fairtax.org

Nobody gives up power - willingly. Power has to be taken from them. Fortunately, we have some very good people in official positions committed to helping us. John Linder, Georgia Republican congressman, is a very capable leader and sponsor of the Fair Tax. Bill Thomas, chairman of the Committee on Ways and Means, issued a statement on March 22 calling for abolition of the income tax and praising the Fair Tax Act. Secretary of the Treasury Paul O'Neill supports this kind of fundamental tax reform. Our biggest opponent is a defeatist attitude among the people who are the victims of this present tax system. Give it a close look and help us! Contact your Congressman by phone, mail and email. Tell him you support the Fair Tax, and he should, too.

Kemp, who knows as much about the intricacies of our federal tax system as anyone, illustrates one good reason why nothing gets done. He correctly criticizes the present tax system as "impossibly complex," but the only solution he proposes is to reduce tax rates, the one part of the Code that is already free of complexity. As he knows, if we were to reduce the tax rate to a uniform one percent, the code would remain as "impossibly complex" as it is today.

I think the American people are ready to consider major changes to our entire federal tax system because our present system is unduly complex, but we seem to be sorely lacking in the area of leaders who are willing to address these problems in an honest way.

The "fair tax" you describe might be an improvement, but it still has some flaws:

1. A sales tax of 23% is still too high.

2. A monthly rebate would add greatly to the complexity of the scheme.

3. "Untaxing" the poor removes a powerful incentive to keep tax rates low. (One of our problems now is that wage earners in the bottom half of the income range pay almost no income tax. These people see little reason to reduce taxes on the "rich," defined as anyone who makes more money than they do.)

Kemp, who knows as much about the intricacies of our federal tax system as anyone, illustrates one good reason why nothing gets done. He correctly criticizes the present tax system as "impossibly complex," but the only solution he proposes is to reduce tax rates, the one part of the Code that is already free of complexity. As he knows, if we were to reduce the tax rate to a uniform one percent, the code would remain as "impossibly complex" as it is today.

Excellent point.

I do hope you are right about the attitude of the American public; however, I fear that too many still burn with envy at the thought that the "rich" will get a tax break. It is an envy that politicians are eager to stoke.

A good indication that you are right about the readiness to change the tax system would be the immediate abolishment of the alternate minimum tax (AMT). The AMT is a grotesquery that even the IRS would abolish; but Congress has been unwilling to give up the income it generates.

Good Luck! The sting of writing the check to Uncle Sam is already beginning to wear off. Soon John & Jane Q. Public will forget all about it . . . .

You are right, of course, but the reality is even bleaker than you describe. Most likely, John & Jane Q. Public did not write a check to Uncle Sam because their taxes have been withheld all year. Soon they will receive their refund checks, which they will treat as a windfall from their generous Uncle.

If we really want to reform the tax system, we should push hard to eliminate withholding. Make everyone write a check to the government for their entire tax bill. Oh, and move election day to the day after taxes are due.

"If we really want to reform the tax system, we should push hard to eliminate withholding. Make everyone write a check to the government for their entire tax bill. Oh, and move election day to the day after taxes are due."

You're right! That would be like a slap in the face to the ignorant masses that might just bring them back to reality! That's probably why the Politicians would never allow that to happen.

I truly believe we have important support among the national leadership of the Congress and the Executive Branch. But we must rally to give them political cover by showing grass roots support for this fundamental tax reform.

I agree, and we need to remember that "we have important support among the national leadership of the Congress and the Executive Branch" because the complexity of our federal tax system causes ordinary people in this country to feel that it is beyond their comprehension. But while they may feel mystified by the tax system, they aren't stupid. They know that their confusion has nothing to do with the simple tax rate tables that they consult only after they've finished grappling with the truly complicated issues. Lowering tax rates simply does not address the American peoples' desire for greater simplicity and therefore does not address what I believe to be the greatest source of taxpayer dissatisfaction.

I think that by constantly emphasizing tax cuts rather than tax simplicity, Kemp has by now pretty well used up his credibility with the American people on this issue. There exists a leadership vacuum out there on this issue and I believe that before too long someone will come along to fill it.

To win this legislative battle, we do not have to have the support of every last taxpayer and non-taxpayer. But we do need the active support of those who really have a dog in the fight: small business-people; self-employed; parents who still have to educate their children, and then hope for their children's future economic well-being. The Fair Tax Act already has the support of national and regional small business groups, the Associated General Contractors of America, the National Taxpayers Union, and a number of other major organizations. But the membership needs to get active, because that is where the Congressmen count heads. We can get this thing done as soon as the November elections take back the Senate. So let's start now and be ready to get the job done.

Dang it! I had a full post prepared to reply to your three points, and somehow it did not post. Well, here goes again: (1) the 23% is high, but consider that the prices of goods and services will be reduced 20% to 30% before you pay them, and you will be using "pre-tax" rather than after tax dollars for the purchase. Do the numbers and I think you will agree we come out ahead. And you have no compliance costs, which presently amount to seven times the amount of tax actually paid by the average small business. And interest rates would fall by 20% to 35% per a study by the Federal Reserve Bank of Kansas City. I think the 23% rate could be lowered within two years due to economic growth. (2) the monthly rebate of taxes would actually minimize complexity, because no one would have to report income to qualify for the rebate. It's cheaper to pay the rebate than process all the income reports, and your financial privacy is saved to boot. Plus the rebate provides "untaxing" the poor from the payroll taxes, actually providing a negative tax rate up to the poverty line; this removes the primary line of defense of those who want to keep the present system, which is that a consumption tax is hardest on the poor. (3) As to untaxing the poor, as I said above, impact on the poor has always been the number one argument of those who oppose a consumption tax. Also, the only ones untaxed are those up to the poverty line. A family of four spending more than $22,500 per year would pay taxes, and that accounts for the great majority. The rebate actually achieves a significant degree of "progressivity" in the effective rate of taxation (zero effective rate at $22,500 per year spending for a family of four, and just under 23% effective rate for a family of four that spends $2,250,000. Check it out on the fairtax.org Q&A. Thanks for your response. (I hope this one posts.)

I agree with your comment on Coolidge, although I have read he declined to give guidance to the Federal Reserve Board as he left office, saying "we will leave that to Wonder Boy" (referring to the newly elected but yet to be sworn in Herbert Hoover). Some additional liquidity from the Fed to accommodate the growth produced by the tax cuts might have avoided the crash brought on by the imminent adoption of the Smoot-Hawley tariffs.

I gave a speech last week on this subject, and had identified the same five categories of problems as Kemp referred to here: . In 1995, the National Commission on Economic Growth and Tax Reform, on which I served as chairman, took a look at this mess and concluded that "The present tax system is beyond repair -- it is impossibly complex, outrageously expensive, overly intrusive, economically destructive and manifestly unfair."

Complexity; cost of compliance; infringement of civil liberties; economic harm; and unfairness. We can do so much better!

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