Rewriting the Code

A roundtable on tax reform

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

(Page 7 of 10)

It is inauspicious that both Bill Archer and Dick Lugar have refused to insist that the 16th Amendment, which allows the federal income tax, be repealed before any national sales tax or VAT is introduced. To implement any consumption tax without first repealing the 16th Amendment is a guaranteed recipe for disaster. Honest supporters of a VAT as a replacement to the present tax must insist both on repeal of the 16th Amendment as the prerequisite for any new tax and on a constitutional prohibition to the return of any income tax. Given the present courts, I despair that even this would save us from Europe's experience, where politicians in every case have used tax reform impulses to saddle their citizens with both taxes.

Tax reform should not blind us to the true battle: the total size, scope, and power of the state. The total tax burden, not simply how it is carved out of our lives, is the target. Perhaps the most important tax reform measure is the Barton Amendment urged by freshmen Reps. John Shadegg (R-Ariz.) and Linda Smith (R-Wash.) to require a three-fifths vote of both houses to raise or introduce any tax. Speaker Gingrich has promised a vote on this amendment on April 15, 1996, and if it doesn't pass then another vote will be held on April 15, 1997--conveniently after the 1996 elections.

All tax reformers should support this amendment--or preferably one that requires a two-thirds supermajority to raise taxes, as is the case now in Arizona, California, and the state of Washington, and may soon be true for Ohio, Florida, and Nevada.

Strategically, friends of liberty should support the Republican efforts to cut taxes and spending at the same time. Linking budget cuts with the $500-per-child tax credit and cuts in the capital gains tax and inheritance tax builds public support for both budget cuts and tax cuts. Let's ratchet down the state, cutting back spending and handing the savings back to Americans in tax savings.

In this process of reducing government, every tax cut is a good tax cut. Mae West made a similar observation about sex. Let's work together to reduce the total tax burden, to protect Americans against a political class that would divide us to better loot us, recognizing that there is no good way to rip 20 to 25 percent of the economy away from those who earned it to be distributed by the political class to those who vote for it.

Asking Americans to choose the best way to be taxed--rather than focusing on reducing total taxes--is too reminiscent of the "choice" the state of Utah offered Gary Gilmore: hanging or shooting?

Grover Norquist is the president of Americans for Tax Reform.

Edward H. Crane Responds

I t's important to keep in mind that the flat income tax being proposed by Dick Armey, based on the research of Hall and Rabushka, is actually a consumption tax. Neither Grover Norquist nor Bruce Bartlett dispute this fact. Thus, the economic impact of both the flat tax and the federal retail sales tax would be the same. That impact, of course, would be enormously positive when compared to our present tax system. So, as I mention in my essay, the issue isn't economics. It is politics and tactics.

There's a little dissembling going on when Grover Norquist consistently uses the VAT and a federal retail sales tax interchangeably. They ain't the same thing, and Grover knows it.

Of course, you could argue (and Norquist does) that a retail sales tax will inevitably become a VAT. But there's less reason to expect that to happen than to expect a flat tax--Bartlett points out that it's not really a flat tax even at the outset--to be twisted and molded into something that looks a lot like what we have today. In either case, it would be best to eventually back up a statute with a constitutional amendment.

One other point. Norquist had better dust off his copy of Power & Market if he actually thinks business income taxes are paid by consumers. They are paid by the owners of the business. The notion that prices are determined by costs, which are easily passed on to consumers, is nonsense. Supply and demand determine prices. Consumers couldn't care less how much it costs for a business to produce a product or how much in the way of taxes it pays.

Back to the issue of politics. As Dan Pilla points out, getting rid of the IRS is an appealing aspect of the sales tax. This is not an agency that spends a lot of time reminding its employees of the Bill of Rights. If we can fund the federal government without it, by all means, let's do it. Flat-tax advocates posture that the retail sales tax will necessitate hordes of revenuers swarming over the landscape to keep shopkeepers from breaking the law. That 95 percent of retailers willingly comply with state retail sales tax requirements already is apparently inconsequential.

But even if there was some problem with collections--and with taxes as high as they are, we could expect some--it's unlikely that missing taxes under a national sales tax would exceed the $150 billion that annually escapes the feds now. Besides, whatever sales tax enforcement agency would be created, it would not be going into your home to discuss every aspect of your personal and business life. How much money you make and how you make it would then be no business of the federal government. Actually, since the vast majority of states that have
an income tax depend on the IRS to enforce compliance at the state level, most, if not all, would switch to a sales tax or increase their current one. Income taxes would be abolished throughout the land.

Moreover, politics in America would forever be changed. The psychological impact of living in a society where it was none of the government's business how much money you made--where your paycheck reflected exactly what you earned--would be huge. It would change people's attitudes on all public policy issues to remove the intimidating and paternalistic Internal Revenue Service from people's lives.

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