Time for Talking about a Flat Tax Again

Whatever the ultimate effect of the new tax bill, one thing is clear: it did not strike a blow for simplification of our tax system.

A 1999 poll by Louis Harris & Associates found that 59% of all taxpayers used professional help in preparing their income tax returns, including 54% of those with incomes under $15,000. We can be sure that the percentage is growing.

No wonder. Credits, deductions, exemptions, phase-outs – they're all written into law, and not too clearly. In an annual exercise, Money magazine hands the same information about a fictional family to about 50 professional tax preparers – and invariably they come up with about 50 different calculations of tax liability.

The Joint Committee on Taxation recently reported that the Internal Revenue Code has 1.395 million words. To administer the Code, the Treasury Department, as of June 2000, had issued 20,000 pages of tax regulations containing more than eight million words.

For taxpayers, the JCT found 649 different forms, 159 worksheets and 340 IRS publications. The most commonly used form, the 1040, had 79 lines, 144 pages of instructions, 11 schedules and 19 worksheets.

Even the Internal Revenue Service is confused by the complexity of the Tax Code. To cite just one example, the New York Times recently carried a story about the confusion over whether hybrid vehicles – those that use a mix of gasoline and battery power – are eligible for a tax credit. An IRS spokesman said, "Unfortunately, this is an area where we have not had any guidance issued."

That's not the only area where the IRS is as confused as the rest of us taxpayers – or maybe more confused. In 1999, taxpayers contacted the IRS 117 million times for answers. According to the General Accounting Office, 47 times out of every 100 the IRS gave a wrong answer.

The legislation just passed is not going to make things any easier. Almost all the changes, whether cutting top rates, offering relief from the marriage penalty, increasing the child tax credit, raising the contribution limits for retirement accounts, or doing away with the estate tax, will be phased in.

Why is our tax system so complex and complicated? The government is trying to use the system for a myriad of objectives. There's social engineering, attempting to reward behavior deemed constructive and punish behavior deemed unconstructive, for example. There is the objective of redistributing income – mostly from one middle-class group to another middle-class group. There are all sorts of special interests vying for special treatment. In other words, there are complex and complicated reasons the system is so complex and complicated.

After the Tax Code is rejiggered to take care of everybody, we end up spending billions and billions of dollars to comply with the rules, to hire tax lawyers and accountants, to lobby to protect our own group's (or groups') self-interest – and the Tax Code gets more complex, complicating changes.

Not much has been said lately about ending this vicious circle by reforming the whole tax system, but a lot should be said.

Just seven years ago, Rep. Dick Armey, now the House Majority Leader, was proposing a flat tax – a system so simple that all taxpayers could fill out their returns on a postcard. Armey got the idea from two Stanford economists, Robert Hall and Alvin Rabushka.

After deducting a personal allowance for each family member, each taxpayer would pay a flat percentage on what was left – Armey said the rate could be in the 17% to 20% range. Business taxes would be almost as simple. The tax base for businesses would consist of total receipts minus cash wages, purchases of good, services and materials used in business and all capital equipment. They would then pay the same rate as individuals.

That's all. No deductions, no exclusions, not even for mortgage interest or charitable giving.

As might be expected, the flat tax idea met with opposition from a variety of sources, including proponents of a national sales tax as the engine of tax reform and defenders of the status quo. After a flurry of interest, discussion, and debate, the idea of tax reform in general moved to the background, overshadowed by exultation about budget surpluses.

But the flat tax was a good idea when Hall and Rabushka came up with it. It was a good idea when Armey (and later Sen. Richard Shelby) championed it in Congress. It's a good idea today.