'Fat tax'

March 04, 1996|By Jerome F. Heavey and Edward N. Gamber

EASTON, Pa. -- Whether from power lifting, power eating or steroids, football linemen are heavier and stronger than they used to be. The Dallas Cowboys, Super Bowl winners, field an offensive line whose average weight exceeds 320 pounds.

But what do the NFL teams gain from the extra pounds? As a group -- nothing.

Despite the expense of maintaining gargantuan body size, the average number of wins hasn't increased; it's one per game. If football has become a more exciting game for spectators, most of the credit goes to the people behind the television cameras.

Paying for giants

Yet no team dares to be without its 300-pounders as long as

another team has them. All the teams pay for giants, but their efforts cancel each other out. None of the teams benefits from having oversized players, but all the teams pay the costs of maintaining them. Every team runs as fast as it can to stay in the same place.

The United States tax code, too, once was lean and fit. Over time it has put on weight and become the ''Fat Tax'' that we know today. Most of the fat deposits are called loopholes, but that is a misnomer. Holes in Swiss cheese make the cheese lighter. Loopholes in a tax make the tax heavier and more burdensome because they complicate the tax and increase its administrative cost. When loopholes make the tax base smaller, Congress reacts by raising tax rates to maintain revenue yield.

Loopholes breed other loopholes. Once we accept the principle that the income tax should be used to encourage one activity by giving it a tax break, we open the floodgates and find more and more activities worthy of special treatment. The tax gets more complicated, the administrative cost grows, and the marginal rates get higher.

A taxpayer deciding whether to lobby congressional representatives for tax preferences is like a football coach deciding whether to use 300-pound linemen.

If all the other teams are using them and this coach doesn't do it, his team is going to wind up at the bottom of the pile.

Taxpayers who overlook loopholes, and who don't argue for more ''special treatment,'' will find themselves losing ground in the income distribution.

Like the race to have ever heavier linemen, the race to find more loopholes is a negative-sum game. All those loopholes cancel. As a group, taxpayers save nothing, but together we shoulder the costs of the ''Fat Tax.'' As a nation we bear the burden of a complicated tax, but as a nation we get nothing in return.

Cherished loopholes

No individual football team is going to give up its 300-pounders, and no individual taxpayer will give up a cherished loophole. But imagine if all of the loopholes were to disappear. The tax base would swell, marginal rates would fall, and as a group we would pay the same taxes as before.

But we would be winners, because we would save the costs associated with the excess weight of the tax.

What would happen to low- income taxpayers? Every flat-tax proposal contains a family exemption, a recognition that ability to pay doesn't begin until some threshold level of income is reached. The exemption is usually set at about the median level of household income, so the bottom half of the income distribution would pay no income tax. Under the income tax now in effect, the bottom 50 percent of the taxpayers pay less than 5 percent of total income-tax revenues.

What about the top 50 percent of taxpayers, who currently pay more than 95 percent of total income tax? Most of them would pay about the same under the flat tax as they pay under the ''fat tax.'' But they would save the costs associated with the ''fat tax.'' These are not just the administrative costs of the IRS, and the time and money taxpayers spend in keeping records and in filling out, or hiring someone else to fill out their tax forms.

Other costs, less visible, are no less real. These include the time Congress spends annually debating tax-reform bills, a no-win game that distracts our elected lawmakers from doing something productive and makes them prey to lobbyists promising support in return for beneficial tax treatment.

Taxing the wealthy

As for taxation of the wealthy, it is worth remembering that high incomes escape taxation not by having low tax rates, but by having provisions in the tax code that exempt income from taxation. High tax rates to ''soak the rich'' are a sham if the tax base is so defined that high rates apply only to minuscule amounts of income.

The most fundamental principle of income taxation is that how much tax you pay should depend upon how much income you have, not upon how you receive it or how you choose to spend it.

The increasing weight of linemen and the complexity of the ''fat tax'' represent the triumph of the illusion that we each can gain an edge on our neighbor if we each get our own special

treatment. It is a costly illusion.

Jerome F. Heavey and Edward N. Gamber are professors of economics and business at Lafayette College.

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