Taxes, Taxes, Taxes

April 19, 1995

As the nation slowly revives from yet another ordeal with the Internal Revenue Service, Republicans in Congress deserve encouragement as they seek fundamental reform of a system that has run amok. A flat tax, a modified flat tax, a national sales tax, a value added tax, a tax only on money spent -- all these are in the congressional hopper and on next year's presidential campaign agenda.

From the Clinton administration comes mostly pious rhetoric that, yes, the present set-up is a horror but, no, it is too risky to indulge in experiments with the world's largest economy. It argues, too, that alternatives now under consideration are less progressive -- and therefore unfair to low income groups. Yet new statistics confirm that the gap between rich and poor in the United States under the present system is the largest in the industrialized world -- and growing larger.

The U.S. now has the lowest savings and capital formation rates of any of our major competitors, due in large measure to an income tax system that encourages consumption and offers precious little incentive for long-term investment.

So what to do?

A decade ago, the emphasis was on change from within. The 1986 tax reforms were designed to simplify the code and move in the direction of taxing all income alike. Unfortunately, this approach was undercut by those insistent on using tax laws as instruments for social policy. Simplicity quickly gave way to complication and increasing government intrusiveness on individual citizens.

This newspaper praised former California Gov. Jerry Brown when he dared to propose a flat tax during the 1992 Democratic presidential primaries. Today we are equally supportive of a similar initiative from House Republican majority leader Dick Armey even though it needs significant revision to boost its revenue potential and meet fairness standards now affronted by a tilt toward the wealthy. Mr. Armey would tax salaries at a flat rate of 17 percent while eliminating highly popular deductions for mortgage interest, charitable giving, state and local taxes and savings for retirement.

Sen. Arlen Specter, a presidential hopeful, favors a modified flat tax at higher levels that would allow the mortgage and charity deductions. Sen. Richard Lugar, another GOP presidential candidate, would prefer a national sales tax collected by the states, thus eliminating the IRS altogether. A variation would be the kind of value-added tax (VAT) used by many European nations.

Obviously, a complete change in the tax system will require much more study, fine tuning and public support. Debate on Capitol Hill this year is a good starting point; presidential elections could provide sharper focus. Final judgment needs to be deferred until 1997 or later. But in the end, this nation needs to fix or junk a tax system that promotes consumption rather than savings, burdens its citizenry unacceptably and curbs productive growth and higher living standards.

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