Scrap The Whole Thing
By Ryan Walsh (09/21/04)
Q: What is complicated, complex, unfair, dull, and hundreds of pages long?
If you guessed Bill Clinton’s autobiography, you’re close.
The answer is the federal tax code, which President Bush described at the GOP Convention as "a complicated mess filled with special-interest loopholes, saddling our people with more than six billion hours of paperwork and headache every year."
The President now talks of an effort to "simplify" and "reform" the code. And he’s not the only one. Speaker of the House Denny Hastert has even proposed abolishing the bureaucratic hive that is the Internal Revenue Service (IRS) and enacting a national sales tax in its place.
The current tax code’s flaws are countless. Among the most obvious is its unfair treatment of savings and investments. For example, Lester gathers the leftovers of some of his previous paychecks and buys a George Foreman grill (mmmm…). The federal government taxes this money once as income at the end of the year.
Lester loves his grill and thinks others will, too. Anticipating a stratospheric boom in Foreman grill sales, Lester invests some of his after-tax income in Foreman stock. Lester correctly calculates the popularity of the grills, and the price of the stock increases. Because the company prospers, Lester’s stock pays huge dividends. Lester’s riding so high that he fails to realize his investment became subject to four additional taxes. As the stock’s value increased, the seller paid a capital gains tax. When the company’s income increased, it paid a corporate income tax. With that after-tax capital, the company paid dividends to stockholders like Lester. They then paid taxes on their dividend income.
To most, a scenario like this is reason enough to scrap the code and replace it with something simpler, fairer, and pro-growth.
Although a national sales tax would accomplish all three criteria, economists deride the idea as unrealistic. Economist Bruce Bartlett estimates that a singular sales tax to replace all current federal taxes would have to be over 60 percent. Another problem is the 16th Amendment, which authorizes the federal government to levy income taxes. If a national sales tax were implemented without the repeal of the 16th Amendment, the return of the income tax—on top of the sales tax—would surely be inevitable.
This leaves us with the decades-old idea of a flat tax. As the idea ages, it seems to experience brief surges in popularity, sort of like the Rolling Stones. The 1990s witnessed the widespread enactment of the flat tax in the most unlikely of places: former Soviet bloc countries. Estonia and Latvia implemented theirs in 94 and 95, respectively, while Russia and Ukraine eventually came around to the idea at the eve of the 21st century.
Since Russia implemented a flat income tax rate, real revenues have increased. As Bruce Bartlett noted, "even the liberal "New York Times" took notice…. A March 23, 2002, report was headlined: ‘Russia Imposes Flat Tax on Income, and Its Coffers Swell.’"
A proposal once derided as a conservative fantasy now seems to be faring well in the regions formerly dominated by Communism. State-controlled economies stifle innovation and capital formation—the former Soviet bloc states know this all too well. They likewise know what is necessary to unleash the vehicles of growth and prosperity. Maybe we should follow suit.
Flat tax, anyone?
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