Yet hardly were the photo ops over when that very same Congress denounced ““the government’’ for the tax code’s deranged complexity. Shaking their fists, they’re swearing to pull the entire system out by its roots. Sounds like the classic cry from the murderer: ““Stop me before I kill again.''
I’d love to, believe me. But the history of this sort of thing isn’t promising. Back in 1986, the tax-reform crowd pushed through a bill that simplified tax returns for the average person. It wiped out some popular deductions (like those for credit-card interest) and used the savings to reduce personal income-tax rates. Had we continued along those lines, fewer mouths would be frothing now.
But tax breaks are America’s addiction of choice. Every interest group in the country–business, labor, farm, consumer, nonprofit–hires lobbyists to try to tweak the tax code its way. The most tweakable legislators harvest dollars and votes. No surprise, then, that new deductions and credits crept back in.
Today’s tax-reform crowd isn’t interested in gradualism. Having wrecked the old code almost beyond saving, they want us to trust them to build one from scratch. There are two main camps. One says, ““Quit taxing incomes; pass a national sales tax instead.’’ The other says, ““Tax only earnings, at a simple flat rate.’’ Neither camp would tax personal interest, dividends, capital gains or inheritances. Roughly speaking, here’s what they want:
The sales tax: The bill on the table comes from Republican representatives Dan Schaefer of Colorado and W. J. (Billy) Tauzin of Louisiana. You’d be taxed on most goods and services bought at retail–food, clothing, insurance, cars, doctor bills, homes, rent, banking and brokerage (although college tuition would be exempt). In theory, you could afford the extra cost, because you’re not paying income taxes any more. The price of goods might even fall. In real life, however, some of us would pay more and others less.
How high is the tax? You have no idea how long it took me to get a straight answer. The press release says 15 percent, but that’s based on a weird calculation you don’t want to know about. At the cash register, the actual markup comes to 17.6 percent. State taxes are extra. The Feds may count them as part of the item’s price, which would increase their dollar take even more. Some other issues:
Collectibility. Schaefer and Tauzin crow that their plan eliminates the IRS. Retailers and service providers would capture the tax, keep half a percent of it for themselves and remit the rest to the states. The states would keep 1 percent of the tax and give Washington the rest. But why should a state work its butt off to collect for the Feds? Conceivably, it could net more money (and leave its citizens richer) by raising its own tax and shrugging off federal tax evasion.
Tax evasion. Tauzin says that sales taxes are a cinch to collect, even without tax reporting and automatic withholding. But the International Monetary Fund’s Vito Tanzi begs to differ. An IMF study of high sales taxes in countries that used them found serious tax-dodging once the rate topped 10 percent.
Federal revenues. The Schaefer-Tauzin sales tax is supposed to raise the same amount of money that the income tax does. But with so radical a change, who can be sure? David Burton of the Argus Group, a Washington law and lobbying firm, thinks the planned tax rate is high enough. Not so, if you believe a study by Daniel Feenberg of the National Bureau of Economic Research in Cambridge, Mass.
Feenberg thinks a 17 percent rate would work only if cheating gets no worse, all retail transactions are taxed (no exemptions for college or basics such as clothing and food) and no exceptions are made for the poor. Schaefer-Tauzin, however, gives every worker a tax credit–regardless of income–to cover as much as a poverty-level income could buy. To cover this revenue loss, Feenberg says, the sales tax would have to rise at least to 22 percent. Burton disagrees. I can’t referee this, but the country runs a big risk of red ink if Burton et al. are wrong.
Winners and losers. High-income folks would save a fortune in total tax–something I haven’t noticed the public clamoring for. In the middle brackets, gains and losses are mixed, says economist William Gale of the Brookings Institution. The working poor would be–to put it technically–screwed. Their incomes would drop, because the earned-income rebate would be snatched away.
Growth might accelerate, although by how much is just a guess. There are unknown transition costs. Older people spending after-tax savings would be taxed a second time. But if you have years to tax-defer money, you’ll do fine. Fewer employees would get health insurance, because companies couldn’t write off the cost.
The flat tax: Pushed by Rep. Dick Armey of Texas, the flat tax comes closer to tax reform’s traditional shape. All current deductions and credits would vanish–gifts to charity, mortgage interest, state tax deductions, child-care credits. There’s a tax-free allowance, depending on family size. On everything else, you’d owe 20 percent the first two years, then only 17 percent. The working poor lose their income-tax rebate. The biggest winners are those who already have money income to spare.
As proposed, the flat tax raises less revenue than the income tax does today. That’s political gaming; Armey needs that low rate to cut taxes for the middle class. To balance the budget, this bill requires deep program reductions–well beyond those passed so far.
As much as anyone, I’d like to see the tax code cleaned up, but separately from the bloody battle over reducing government spending. Maybe an Armey-type tax with a couple of brackets (to raise enough revenue) and a promise not to throw the working poor to the sharks. The 1986 disappointment convinced me that tinkering won’t work. But neither will a riverboat gamble that wrecks the fiscal discipline that we’ve worked so hard to win.
