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 income 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 working 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.
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?
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 Congress 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.
Any proposal, if it is to actually reduce the size of government, must reduce the number of people who perceive themselves to be receiving a net benefit and increase in numbers those of us who feel we carry more than our share of the burden. This will happen only if tax policy and tax rates apply equally to everyone.
We cannot assume the IRS would simply roll over and die. Although under a sales tax, the IRS may have less reason to intrude in the lives of private citizens, they would still be there to insure compliance under both plans. As long as there is a chance of creative bookkeeping, of underreporting, of evasion, there will be a need (in the eyes of the IRS) to enforce compliance with the tax code. In essence, if there are taxes, there will be a taxman.
There is also an inequity in either system. The one assumes the more I spend, the more I should pay to offset government expenditures. The other assumes the more I earn, the more I am obligated. Either way, it seems a crazy way to finance a government to me.
Stephen Kolcow Jr.
In your recent tax debate, only Grover Norquist had a handle on the answer, which is to devote our energy to reducing the size of government and worry less about how its cost is gouged out of our hide.
As he correctly realizes, any national sales tax at the retail level will quickly deteriorate into a value-added tax such as the Hawaii State Excise tax, which is on every transaction at every level. One can only imagine the creativity in tax avoidance which will ensue when transaction taxes rise from 6 percent to 30 percent. A national sales tax will simply force more transactions, and businesses, underground. Once underground, businesses no longer pay any taxes, cannot borrow or enforce contracts, and ultimately the country slides into a Third World economy.
The Hall-Rabushka flat tax has a major flaw in that it allows low-income people to pay no direct tax at all. People who pay no direct tax have no stake in government spending and will become tax-and-spend constituents supporting whoever promises to raise other people's taxes and spend it on them.
The flat tax is my favorite, but with no one left out and with no exemptions. Only when a vast majority feel the pain directly will we get budget relief–which is my ultimate goal.
In offering their opinion on the optimal tax system, the analysts in REASON's roundtable on tax reform necessarily assume that the next tax change will be the last.
The Kemp-Roth changes in the 1980s essentially gave us a flat tax; the second bracket kicked in at about the same income level at which FICA withholding ended. But presidents of both parties agreed to impose new, higher rates on "the rich." The contract of the 1980s, in which we ceded some tax exemptions to buy lower rates, was broken. The exemptions are gone but we are now back up to five tax brackets. Imagine either the flat tax or the national sales tax/VAT 10 years later after several "millionaires' taxes" have been enacted as additional taxes on income. The result is on display in Europe and Canada.
Limiting Congress's power to sell tax favors is more important than the details of the resulting tax. I suggest that the gist of such an amendment should be: 1) There shall be only one federal tax; and 2) It shall have only one rate.
Separately, the zeal to abolish the IRS should be tempered by noting how some state tax agencies have fished through credit card and licensing records for evidence of out-of-jurisdiction purchases. This indicates that a consumption tax or VAT (especially at current federal levels of revenue and evasion) does not alone end the risk of intrusive enforcement.
I was rather bemused by the flat tax versus sales tax debate in your July issue. Presenting such a choice reminded me of the one given the condemned man–shooting or hanging? Each side described the evils of the other's proposal, and both were absolutely correct. Rather than debating the best way for the state to pick our pockets, libertarians need to concentrate our energies on reducing government spending (and thus intrusiveness) to the absolute minimum. When the federal role has been returned to that conceived by the Founding Fathers, how remaining taxes (if any) will be collected will be of little interest.
Hal W. Noyes
Edward H. Crane makes a strong case for the federal retail sales tax. But he makes an interesting point that is hard to support: "Suddenly we…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."
Today, no one is aware of the tax paid to the federal or state governments on each gallon of gasoline he or she buys. In days past the cost of the gas, the federal tax, and the state tax was posted on every pump. That made it hard for federal and state legislators to increase the tax without a public outcry.
Once the retailers were unable to show the tax automatically the politicians could raise taxes and bury them in the cost of gasoline. Whenever taxes were raised, as far as the consumer was concerned, the price of gas went up. The same system would soon follow with other products. If you enjoy blank looks, ask anyone how much he paid for gas last time he filled up. If he even knows, then ask how much was the federal state tax and how much was the state tax.
North Hampton, NH
There are other objections to a consumption tax that were simply hinted at or not mentioned. First, imagine just how far down the ladder such a tax could go. Any transfer of goods might end up subject to a national sales tax; picture the feds requiring that homeowners throwing yard sales or people selling personal belongings collect and submit sales taxes.
Second, the national sales tax's proponents claim that the Internal Revenue Service can simply be done away with and that the government will no longer have any need to track incomes. What hogwash. The IRS or a successor will have to remain, if only to investigate and try to collect owed but unpaid income taxes of years past–unless the government intends to forgive all income tax evasion, which would be foolish and unfair. Besides, someone on a federal level will have to enforce collection of a national sales tax as a last resort in case states cannot or will not handle it; it may as well be the IRS.
And the federal government will still monitor your income, since not one of the tax reform proposals now under serious consideration–and this also applies to the flat-rate income tax proposals–will change or eliminate the separate Social Security and Medicare withholding from wages. The poor often already pay more in these taxes, which start at the first dollar earned, than in regular income tax, which does have a personal allowance, so they would still get hit. Repealing the 16th Amendment would seemingly make income-based withholding for these programs unconstitutional, so just how would they be handled? No one is saying.
Along with the mechanism for monitoring income to ensure that you pay Social Security and Medicare taxes, the mechanism for withholding from income will still be there and could easily be resurrected for a revived income tax. A lack of constitutional authority did not stop Congress from imposing an income tax during and after the Civil War, nor has it prevented widespread federal usurpations of Ninth and 10th Amendment rights today. And this, above all, shows what a scam "replacing" the federal income tax with a consumption tax would be. One day we would still end up with both and with an even more pervasive federal government monitoring every sort of transaction. Better the evil you know than the evil you don't: Let's pursue something like Rep. Dick Armey's flat-rate income tax plan, not a national sales tax.
Edwin Krampitz Jr.
I was disheartened to see that the approach to tax reform taken by Messrs. Crane and Norquist in the roundtable on tax reform favored political tactics over economic efficiency. They seem to be so intently focused on their overriding goal of smaller government that they would impose a tax system both highly visible and painful to collect. They assume that painful taxes will necessarily lead the electorate to demand lower taxes and smaller government. This approach is risky. During the 1930s, economic pain led to more government and higher taxes. Economic hardship sometimes leads to even more harmful policy and neither Mr. Crane nor Mr. Norquist address this possibility.
The growth of the central government throughout this century cannot be explained by the existence of a painless tax system. If painful taxation were an effective means to affect a lower overall tax burden, the current system would have reduced tax revenues to rock bottom. And if the present tax system is too invisible, then why is sweeping tax reform such a popular issue?
The tax system has grown larger and more complex because the system is used by politicians to grant privileges. Taxpayers do prefer complicated high taxes to simple low taxes as long as the system includes a special feature they find particularly favorable. The U.S. tax code is not a mess because taxes are painless. Our current tax code is the natural consequence of political power that lacks the proper constitutional restraint.
If individuals are to enjoy the greatest degree of economic freedom and prosperity, then the tax system must be one that is guided by economic efficiency. To protect the tax system against the political pressures of special interests, it must be buttressed by explicit constitutional constraints on Congress. The principle of equality before the law should apply to taxation just as staunchly as it should to all legislation.
Santa Barbara, CA
I enjoyed your roundtable on tax reform. For a long time, I have been in favor of a flat tax and considered a value-added tax a recipe for higher taxes.
My first reactions to a flat sales tax were negative. It seemed very regressive since lower-income people spend a far greater proportion of their earnings on necessities. Although I am sympathetic to Daniel Pilla's position that a sales tax would eliminate the IRS, I somehow doubt whether that would in fact happen. I can't imagine a huge government bureaucracy just closing their books and going out and finding real jobs.
I suspect the IRS would wind up working with the states to aggressively enforce compliance by small businessmen and entrepreneurs. With a much smaller number of tax collectors as compared to tax payers, the IRS would be able to greatly increase its percentage of audited businesses and probably become a very intimidating factor in the lives of our most productive segments of society.
While all the arguments for the various tax proposals were good, it was the responses that were most enlightening. I was left with the view that no proposal is going to improve the situation much, if at all. Maybe we need to go back to our roots and remember that, as Sy Leon stated long ago, "The lesser of two evils is still evil."
Park Forest, IL
The absurdity of attempts to censor the lyrics of popular music is perhaps best illustrated by applying to the classics the language of the legislation proposed last March in New York state, and quoted in Mubarak S. Dahir's excellent article ("Sticker Shock," July).
Under the proposed standard, the state of New York would criminalize the sale to minors of a significant portion of the standard operatic repertoire, starting with nearly everything by Verdi. A few more examples: suicide–Tosca, Tristan und Isolde, Götterdämmerung, Madame Butterfly; incest–Die Walküre is contraband. Adultery? There goes Lady Macbeth of Mtsensk, Don Giovanni, Così Fan Tutte, Falstaff, and Der Rosenkavalier. Religious violence? Samson e Dalila, Parsifal, and maybe Tannhäuser. Morbid violence? Salome, Siegfried, Jenufa, Der Freischütz, and more.
Aside from the obvious violence they are doing to the First Amendment, those who purport to protect young people by attacking their music are, of course, treating the symptoms, not the disease. Like it or not, substantial market demand for these controversial works exists; perversely, as Mr. Dahir notes, restrictions may even enhance that demand. Advocates of this silliness would expend their energies far more productively elsewhere. Let us all encourage them to do so.
Frank C. Magill
Glen Carbon, IL