Rewriting the Code

A roundtable on tax reform

Bruce Bartlett, Edward H. Crane, Daniel J. Pilla & Grover Norquist from the July 1995 issue

(Page 2 of 9)

Moreover, in a study commissioned for the IRS itself a decade ago, Arthur D. Little Co. estimated that Americans spend some 5.4 billion hours of work a year just to comply with the tax code. Author James Payne puts the cost of those hours at about $250 billion per year, or about one-third of what the federal government hopes to reap from individual and corporate income taxes in 1995. In addition, Payne argues, the true cost of compliance should include the disincentives to savings and work and the costs of enforcement, litigation, and tax-distorted investments. All that could easily double the cost of this bizarre tax system to the American people.

Another benefit of switching from a high-compliance-cost system to a low-cost system is that it would free 120,000 tax bureaucrats and untold tens of thousands of bright lawyers and accountants in the private sector to engage in productive work that increases our standard of living--and would probably make them feel better about themselves, to boot. Flat-tax advocates' arguments that a sales tax would have high compliance costs are disingenuous; 45 states already collect sales tax.

But the best reason to support replacing the income tax with a retail sales tax is political. Today when someone mentions tax reform, Americans wisely grab their collective wallets. The politicians and bureaucrats of the New Class have down to a science the business of playing one tax-paying group off against another: farmers against manufacturers, rich against poor, old against young, workers against management, and on and on.

The tax system in America is so complex that it's virtually impossible to create a sense of taxpayer solidarity against taxes. Rather, each interest group spends its time lobbying to increase taxes on other groups in the (usually) futile hope that its own taxes can be reduced. That the complexity of the tax code is a key to the politicians' ability to continually increase taxes while constantly talking about decreasing them should be obvious.

The federal retail sales tax ends all that. Whether it's set at 20 percent, 25 percent, or 30 percent, Americans need only vote for the candidate who promises to lower it--the most. Suddenly we do have taxpayer solidarity. Suddenly, with no withholding or other hidden taxes, everyone is aware of the cost of government every time he or she buys a product. Lowering federal taxes suddenly becomes much easier.

The flat income tax was the cutting-edge initiative during the Reagan years, and many supply-siders such as Bruce Bartlett, Jack Kemp, and Grover Norquist still support it for that reason. But the mood of the American people is considerably more radical today. They want to abolish the income tax, and it would be a tragic error to allow old political allegiances to get in the way.

The energy behind abolishing the income tax and eliminating the IRS is the same energy behind the term-limits movement: No more kidding around. No more trusting the politicians to do what they say they'll do. After passing a statute, Congress should report out a constitutional amendment, replacing the 16th Amendment and limiting federal revenue to taxes on retail sales and services. The people want to take back control of government and then radically downsize it. That means cutting spending, which first requires cutting taxes, which is what the federal retail sales tax will make much more feasible.

When Sen. Richard Lugar (R-Ind.) campaigns for the presidency on a platform calling for the abolition of income taxes and Bill Archer (R-Tex.), the chairman of the powerful House Ways and Means Committee, says he favors scrapping income taxes and replacing them with a sales tax, you know this is no longer an idea confined to the political fringes.

If mainstream politicians like Archer and Lugar feel that intensity of public support for this idea, the time has come for all advocates of a free society to lend a hand. This is an enormous opportunity to role back the power of government in our lives. It is an opportunity to tell your federal bureaucrat, "Look, I appreciate your interest, but please get out of my face--you'll get yours when I buy something."

Edward H. Crane is president of the Cato Institute.

Killing the IRS

By Daniel J. Pilla

Are you fed up with the annual ritual of gathering bags of receipts, poring through pages of convoluted tax forms, and working into the night on the mind-numbing task of preparing your income tax return? Does the idea of filing your tax return on a postcard appeal to you? Does the thought of an IRS audit terrify you?

If so, you are among the millions ready for a radical change to our tax system. A driving force behind the push is the frustration of dealing with the Internal Revenue Service.

The IRS wields awesome powers. It can execute wage and bank levies, seize property, and obtain your most personal records, all without a court order. Even worse, you are presumed guilty in virtually all your dealings with the IRS; unlike the common criminal, you must prove your innocence. Since our tax law consists of 17,000 pages of regulations, compliance is often an impossible task.