Letters

From the November 1995 issue

Taxing Battle

The excellent roundtable on tax reform ("Rewriting the Code," July ) is thorough, thoughtful and comprehensive, yet fails to take account of a few basic facts that affect all of the proposals.

Total spending by all levels of government (a better measure of the real tax burden than total explicit taxes) was 41 percent of national income in 1994 (28 percent federal, 13 percent state and local) and 49 percent of personal consumption (33 percent federal, 16 percent state and local).

To replace all other taxes and eliminate the deficit, yet be "fiscally neutral," a flat tax on in come will have to average roughly 40 percent across the 50 states, and a flat tax on consumption, roughly 50 percent. If either provides a personal exemption, the rate will have to be a good deal higher than that. These rates are approximate because the drastic change in the tax system would undoubtedly change both government spending and national income. We need, as the recent jargon goes, a dynamic, not a static, analysis.

It is literally impossible to collect taxes at these levels without a large, intrusive, and inefficient bureaucracy. Its initials might not be IRS, but the substance would remain. It is almost as impossible to collect such taxes by direct payments by taxpayers. That is why those of us at the Treasury work ing on tax reform supported withholding at source in 1942 when we were faced with the need to collect extremely high rates of taxation to help finance World War II.

Having written an article on a spending (i.e., consumption) tax in 1943 (true, for wartime, but ever since I have supported taxing consumption rather than income), and proposed a flat tax in 1962, I am clearly not opposed to either concept. However, I did not assume that a flat rate income or spending tax would replace all other taxes, or eliminate a large bureaucracy. Moreover the rates required to be "fiscally neutral" are far higher now than they were shortly after World War II or in 1962.

The important conclusion is that there is one and only one effective tax reform: cutting government spending. And the only effective way to cut government spending is to cut taxes, in whatever way, for whatever excuse, at any time. If tax cuts do not precede or accompany spending cuts, those cuts, I predict, will either never occur or, if they do, prove temporary. Undoubtedly some ways to cut taxes are better than others, but any way is better than none.
Milton Friedman
Hoover Institution
Stanford, CA

Just a few days after I received the July issue of REASON, I was listening to the Rush Limbaugh radio show. Mr. Limbaugh took a call about the proposed federal sales, or consumption, tax from someone claiming to be an employee of the IRS. This caller outlined a potential nightmare of paperwork in conjunction with a national sales tax that none of your authors considered in their articles on "Rewriting the Code."

He argued that a consumption tax would be even more invasive of privacy than the present income tax system. According to this caller, the IRS would require citizens to save all receipts to prove that they paid their consumption taxes.
In addition, I imagine that we would still have to inform the IRS of our income,
investments, and savings so that they could verify that we spent the amounts claimed.

Just imagine the boxes of receipts that we, and our children, would have to save were Congress to pass a consumption tax without prohibiting the IRS from acting in such a manner.

I guess it just goes to prove that all means of taxation are onerous in one way or another.

Questions for your authors: Would a sales tax apply to the purchase of securities? If not, on whose guarantee? If so, how would a sales tax prove beneficial to savings and investments?
Robert Bascle
Luling, LA

Any tax with a rate of zero percent for some people and 15 or 20 percent for others can hardly be called "flat." Unfortunately, any flat tax we may end up with will be "flat" in name only. And that is a part of a much larger problem.

For years politicians have been convincing Americans that a) We can have it all and b) Some one else will pay for it. For some people this may be true. For many others, however, it may be perceived to be true. The perception that they are getting a free ride at the expense of "the rich" or "big business" is sufficient motivation for people to vote themselves more benefits. Too many Americans don't realize how much the tax burden is costing them.

I agree with Grover Norquist that taxes should be "visible, painful, and applied equally to all taxpayers." Bruce Bartlett points out that under a flat income tax, "A family of four would have to earn $25,000 per year before it paid any income tax" and that "there is no possibility that the Con gress would enact a sales tax without doing something to reduce the burden on the poor." Yet, to include a zero percent rate (or a rebate mechanism in the case of a sales tax) for some people is to leave in place the incentive for these people to continue voting for higher taxes.