It's a simple matter of 3,132 extra pages

September 10, 1997|By Daniel J. Mitchell

IMAGINE, IF YOU WILL, a damsel in distress. She has been captured by an evil ogre, who is dragging her into the forest for unspeakable purposes. Riding to her rescue are two gallant knights, each possessing strength, virtue and courage. But both knights are so eager to be the hero that they fight each other for the privilege of defending the lady's honor. As they are consumed by this contest, the ogre sneaks off with the damsel, giving our story an unhappy ending.

Unfortunately, this may turn out to be the parable of tax reform. Economists have long argued that America's multiple-rate, loophole-ridden tax code penalizes productive behavior and costs the economy untold billions of dollars each year. Most Americans, including a surprisingly large number of politicians in Washington, agree that the current system stinks.

But the advocates of change are divided between proponents of a flat tax and proponents of a national sales tax. And just as the squabbling between the knights allows the ogre to escape, disunity among tax reformers is sure to strengthen the ability of special-interest groups to defend the current system when the battle comes, perhaps as early as next year.

What makes this split frustrating is that the flat tax and the sales tax are practically identical. Both would junk the current system. Both would restore fairness by taxing people at one low rate. Both would eliminate all forms of double taxation (such as subjecting dividend income to both the corporate and personal income tax). And both would wipe out special preferences for the politically well-connected.

The only real difference between the two would be the collection point: The flat tax imposes one low tax rate on income when it is earned, and the sales tax imposes one low tax rate on income when it is spent.

The benefits of replacing the current tax code with either approach would be enormous. The economy would sprint ahead, since the tax code no longer would punish productive behavior and double-tax savings and investments. Many economists predict that within a decade the economy would be 5 percent to 10 percent larger than under the current tax code. This is significant, since an uptick of as little as 0.1 percent in the economy's growth rate, sustained over 10 years, would mean an additional $5,000 in annual income for an average family of four.

The flat tax and sales tax also would dramatically curb the cost of complying with the tax code -- the $157 billion individuals and businesses pay accountants each year to slash through the tax jungle. Under the flat tax or sales tax, it would drop to about $10 billion per year, since most taxpayers no longer would need to hire professionals to prepare their tax returns.

Shrink the IRS

Of course, a simpler tax code also means a smaller IRS. The current system of deductions, exemptions and preferences for ''approved'' behavior requires a huge enforcement agency to scrutinize every penny we make, what we spend -- indeed, how we live. The slightest taxpayer error gives the IRS the authority to seize people's property, garnish wages and freeze assets. The agency's own mistakes -- and they are many -- go unpunished. The flat tax and sales tax would not eliminate the IRS, but their simplicity would leave it with little to do.

This year's tax bill creates 285 new sections of the tax code and changes another 824, according to the Commerce Clearing House. And don't think the changes are minor. The capital-gains tax form will go from having 23 lines, which was bad enough, to 56, thanks to the new law. The Research Institute of America, meanwhile, needed 3,132 pages just to explain what was in the bill.

The only winners from this approach are lawyers, lobbyists and accountants. For taxpayers to win, we need to junk the entire tax code and go with either the flat tax or sales tax.

For my part, I have always favored the flat tax. But I am willing to abandon it if the sales tax turns out to be a more politically realistic way of achieving a fair system that applies one low tax rate to everyone. Of course, supporters of the sales tax must be willing to switch horses as well.

This much is certain: Only if the two knights stop fighting each other can they defeat the ogre and rescue the damsel.

Daniel J. Mitchell is a fellow at the Heritage Foundation ( This article is adapted from Reason magazine.

Pub Date: 9/10/97

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