Washington: Killing off the federal 4ncome tax code has taken on such extraordinary political momentum that the big question in Washington now is to whether to do it, but how.
Republicans see the abolition of the Current tax code as the explosively ‘popular issue of this century’s end. ‘Shrinking or even eliminating the Internal Revenue Service is a surefire Political winner, they believe, and for most Republicans, it is nothing less than the Lord’s work. In control) of Congress after 40 years in the wilderness. they see their big chance. Democrats, from liberal House minority leader Richard Gephardt to conservative Georgia Senator Sam Nunn, also are jumping on board, Politicians across the spectrum sense a profound Public vexation with a federal income tax widely perceived as unfair, intrusive and so Byzantine that not even the TRS comprehends it, A growing chonis of detractors also blames the tax code for a slump in savings, declining Wage growth and falling living standards.
Three camps are now fighting for the high ground: those who want to “pull the income tax up by its roots” and replace it with a 17 percent national sales tax, those who advocate a flat 7 percent tax applied on all income, and a bipartisan hybrid that would keep the current code but exempt all savings gad investment.
The ground is shifting so fast that the hybrid, considered radical only a few Months ago, now appears too timid to ‘win wide support It is backed by senators Nunn and Pete Domenici, RN.M.
House majority leader Dick Armey, the leading proponent of the flat tax, said all three proposals “have caught the mood of the American people,” Sho, he argued, view the current income tax as “obnoxious, oppressive, Counterproductive, annoying and unfair.
Armey’s flat tax is based on work by economists Robert Hall and Alvin Rabushka of the Hoover Institution at Stanford University. Former California governor Jerry Brown, a Demofat, also promoted the idea when running for president in 1992, Indiana Senator Richard Lugar, a can presidential nomination, is pushing for abolition of the income tax and its replacement with a national sales tax. He has a powerful daily in House Ways and Means Committee chairman Bill Archer of Texas, who has already held hearings on the issue.
Calling the income tax “the biggest impediment to economic growth m this country,” Lugar said that in his travels, “every time I mention the end of the income tax, there is enormous, applause when I say we should eliminate even part of the IRS, threescore applause. A sense of oppression here is palpable.
Americans spend 5 billion hours a year complying with federal income taxes, Lugar said roughly equal to the total hours worked by everyone in his home state of Indiana, The IRS, by its ‘own estimate, fails to collect $127 billion each year from 10 million people who do not file.
All sides agree that the current code punishes savings and favors consumption, a bias that economists widely view as a cause of low investment, which ultimately plays out in stagnate living standards.
By some estimates, today McLean income would be $50,000 rather than $35,000, if savings rates and productivity increases had remained at their pre1974 levels.
Yet as appealing as radical change may sound, the current tax code is so deeply embedded in nearly every household and business decision that any overhaul however beneficial in the long run, would cause major disruption during the transition, “This is very, very heavy lifting,” Lugar said, The bumps in the road are enormous.”
Both the sales tax and the flat tax. would end all tax preferences and deductions—for home mortgages, charitable contributions, education, health insurance and municipal bonds, to name just a few. The value of the home mortgage deduction alone is built into the price of every house in the United States, and its removal could cause home prices to sink and homeowners to revolt. A sales tax would hit “old” savings, so that an elderly couple with $100,000 in the bank would face an added 17 percent tax, even though they already paid income taxes on the same money.
Contracts of every sort throughout the economy would be affected. Employer paid health insurance, which enjoys a huge tax exemption, would be more costly. Countless business decisions driven by the tax code would be thrown askew. An entire industry of accountants and lawyers that makes its living on the tax code would stand to lose. Critics of the national sales tax contend that when it is added to state sales taxes, the rates would approach 3 Percent, leading to mass evasion through smuggling, bartering or other ploys. Collection would be a burden for retailers and service providers, they contend: And unless the 16th Amendment to the Constitution, which authorizes the income 1ax, were repealed, they argue, Congress could easily wind up imposing a national sales tax without eliminating the income tax, leaving the country with the worst of both worlds. The country would probably wind up with a European style value added tax, which is hidden in the cost of all goods ‘and is easily raised by politicians. Critics of the flat tax argue that Congress will never be content to impose just one rate, and that over time, the tax will grow back into the same monster it is now. The flat tax would preserve the IRS, albeit in a much shrunken form, and retain the intrusive and bus den some system of recordkeeping and audits necessary to establish income, they add Critics of both proposals say the plans favor the well-to-do. Both would end double taxation of investment, Income now is taxed when it is earned by a person or a business, and then again when it is invested, through taxation of stock dividends, interest income and inheritances, Both proposals would laminate all such taxes.
Both proposals would levy the same lax rate on every dollar, regardless of its source, also sharply reducing the progressiveness of the current code, which applies higher percentage taxes on higher incomes.
To protect people at low incomes, Armey’s plan calls for an exemption on the first $33,000 of income for a family of four. All income after that would be taxed at the same 17 percent rate, no matter how much is earned, Someone earning $50,000 will pay the same 17 percent rate as someone earning $100,000, but the total amount paid will be less, Eliminating deductions also adds nearly as much progressiveness as the current code offers, some outside studies show. ‘Armey defended his flat tax as fair, “if you define faimess as treating everyone the same.” He dismissed proponents of higher taxes on high earners as “people who have a lot of jealousy and envy.
The Clinton administration has criticized the Armey flat tax, saying it will not raise enough revenue at 17 per cent.
To combat the inherent repressiveness of the sales tax, which hits the poor hardest because they spend a larger share of their incomes, Lugar would exempt food and medical services. , He defended his plan’s fairness. “Every dollar you earn is your own,” he: said, because money is only taxed when it is spent. “You can keep it and you can pass it along to your loved ones, whether it is your family farm, your family business or your cash.” All sides agree that their proposals are Way (00 radical to implement this {year or next. However, they hope to fay the groundwork for a major debate during the 1996 presidential and congressional campaigns, in hopes that by 1997, they will have enough momentum to enact radical reform.
Article extracted from this publication >> July 28, 1995
