Time For A New Tax System

The objective of the Tax Reform Commission appointed by Speaker Gingrich and Majority Leader Dole was, in the words of its chairman, Jack Kemp, "to tear apart the whole tax code…and draft…a dramatic reform."

As a member of the Commission, I believe the report we issued on January 17th completed this mission.

The tax code as it exists today is unjust and unfair. Its definitions are complex, its regulations often incomprehensible, and its enforcement ranges from lax to nasty. It is a politicized method of unequally extracting income from people who have earned it and transferring it to people who haven't, but who the politicians in Congress think have a superior claim to it. Sugar and ethanol producers, drug addicts who need federal dollars to support their habits, and pornographic arts programs come to mind. Congress simply uses the code to reward its friends, punish its enemies, and – of course – to get itself re-elected.

The income tax takes as much as 40% of what we earn each year, and half of anything left over when we die – the family farm, the small business we have built, or the savings we have worked so hard to accumulate. Compliance takes 5.4 billion hours of our time, and if we disagree with the IRS, the burden of proof is on us – we are guilty until we prove ourselves innocent. The IRS can search our property without a warrant and seize our assets without a trial.

One of the brutal byproducts of the tax code is stagnating incomes for individuals but galloping revenues for government. Between 1973 and 1993 annual income growth for middle class and low-income wage earners has remained flat. In roughly the same period (1973-1995) government "take home pay" has increased 58% in real terms. Family earnings have not risen, while the government's have increased 58%. There's fairness for you.

The members of the Tax Reform Commission believe it is time to repeal this whole sorry mess and begin again. A new tax system proposed by the Commission would be based upon three principles.

First, a generous personal exemption. The Commission did not set a number, but for discussion let's use $7,500 ($30,000 for a family of four) on which no income tax at all would be due.

Second, earnings above that amount would be taxed at a uniform, low rate, say, 19%. (again, my hypothetical rate, not the Commission's.) All taxpayers would pay the same rate of tax, which is not only fair but presumably what the Constitution means by "equal protection of the laws." The rate could only be increased by a two-thirds supermajority vote of each House of Congress.

Such a tax system would be progressive. As the table shows, with a 19% rate, the wealthy family of four would pay a higher percentage of its income in taxes than a middle-income family.

Income Taxable Income Tax Due Tax As a %
of Income

$ 30,000 $0 $0 0%
45,000 15,000 2,850 6.3%
60,000 30,000 5,700 9.5%
120,000 90,000 17,100 14.3%

The Commission's third principle is that income should be taxed only once. This would make the employee's half of Social Security taxes deductible and eliminate the double taxation of investment income. It would also eliminate death taxes and the alternative minimum tax.

The adoption of such a progressive, uniform tax rate system would cause an explosion of growth in the American economy, creating millions of new jobs and billions of dollars of take-home pay. The Hall-Rabushka flat-tax proposal was estimated to increase economic growth a full percentage point per year. Although that increase may seem small, a percentage point increase in the growth of the economy translates into 6 million jobs and two trillion dollars in real economic productivity over 8 years. It would also increase government tax revenue by nearly $700 billion.

By discouraging investment, innovation, and the taking of risk, the current tax code is restraining the U.S. economy's growth rate to about 2.5% per year. With a progressive flat tax, the economy could be growing 4%, or perhaps more, which would bring real increases in their quality of life to tens of millions of American families.

That is the goal of the Tax Reform Commission's proposal: to increase jobs, growth, income, and the quality of life. With our current tax code, these things are impossible. With a progressive flat tax, they can be achieved.