April 1999
by Fred Holden
as Published in Wealth Building magazine, March 1998, Pages 76-79
WHAT TAX for TAXTAKERS to TAX TAXPAYERS?

Word Count: about 2,056 words plus chart(s)

Why important? Since the income tax was authorized by the 16th amendment in 1913 the tax burden has grown steadily and oppressively. Though hard to identify, 1997 per-person (not per-family) burden of taxes called "taxes" is about $7,500. Cost of government, which includes also licenses, fees, permits, fines and borrowing, is $9,500 per person per year. What began with a four-sheet return and several pages of instructions has become a time-consuming, frustrating, wasteful, intrusive, invasive nightmare of thousands of pages of code, tens of thousands in interpretations and court rulings, and a blizzard of paper for verification and compliance, which costs over $200 billion and 5.5 billion man-hours a year. More special interests retained lobbyists to work on taxes than any other issue. "How Taxes Corrupt" by House Majority Leader Dick Armey, (R-TX) (Wall Street Journal, 6/19/96) showed the lobbying industry employed over 67,000 in 1993, one-sixth of the private sector employers in Washington, generating over $8.4 billion revenue. Getting special favors, exemptions, tax breaks and protection is a justifiable investment of big business funds to a large and powerful government.

Background: America's founders had a clean parchment to write on. Their U. S. Constitution avoided the income tax like a plague, instead, relying on "duties, imposts and excises," mostly on imports, to pay off revolutionary war debts and finance the new nation. Alexander Hamilton's take on taxes was, in effect, "If taxes become too high and unfair it curbs economic activity, encourages evasion, and revenues to the government fall. Conversely, if taxes are low and fair, economic activity is stimulated, compliance will be high, and revenues to the federal government will rise." Hamilton said in offering the American public benefits many people will say, "Yeah, I'll take the benefits," that is, if they do not understand what the costs are. But when you create a tax system that is totally visible, everybody can see exactly what the cost is, that every time they buy something they feel that bite. All of a sudden you have benefits linked to the cost. Our present system is so convoluted most people do not know or understand what taxes they pay, don't have a clue that they pay income taxes twice, once with their withholding and April 15th 1040 form, and once again in the price of all products, goods and services they buy. This has bred a zealous IRS and tax reform fever.

FLAT, VAT OR SALES? THE TAX DEBATE RAGES
by Fred Holden, Public Policy Specialist, Speaker and Author, TOTAL Power of ONE in America
(published in Wealth Building magazine, March, 1998, pp 76-79)

Grab your wallet, purse or bank account. Tax reform is in the air. For the first time since a constitutional amendment allowing the U.S. government to tax income became law in 1913, a completely new tax system is a real possibilitiy. It is unlikely there will be dramatic changes in 1998, but more and more Americans are supporting a flat income tax system and/or a national sales tax.

The tax pot got hot following Sen. William Roth's (R-Del) Senate Finance Committee, Internal Revenue Service oversight hearings in September, 1997, when flagrant abuse of IRS power was exposed. Both political parties are in the game.

Mid-December, 1997, Democrats Sen. Ted Kennedy, D-MA., and House Minority Leader Dick Gephardt, D-MO., went head-to-head with House Majority Leader Dick Armey, R-TX, and Rep Billy Tauzin, R-LA to overhaul the tax system.

Both Democrats want post card returns, Kennedy's "with progressive tax rates," Gephardt's, a 10-percent tax with nearly all tax credits and deductions eliminated, except for home mortgage interest. Armey's postcard would be for a single, flat rate and few deductions. Tauzin's would be paperless for citizens; businesses would collect the sales tax.

Basically tax reform advocates have four choices, 1) keeping the present system but changing the way the IRS operates, 2) a value-added tax, 3) a flat tax, and 4) a national sales tax.

The Cat in the Hat won't be a VAT

The value-added-tax is where a percent of taxes are levied on the added value of manufacturing of products at various phases of processing. For the manufacturing sector VAT is an expensive compliance and documentation nightmare. But it's a politician's dream-come-true to raise big bucks just by hinting a certain part of a certain industry is in the VAT or VAT-increase cross-hairs. A few whispered words and plain brown envelopes of campaign green are sure to abound.

Rep Bill Archer said about the VAT , "Nothing could be worse than attaching another federal tax to our burdensome tax system." He called it unfair to draw a comparision between his advocacy of a consumption tax, which he strongly supports, and the European VAT, which they impose in addition to the income tax. Archer said the VAT is "temptingly easy for politicians to boost."

While VAT collects loudly for a government, it is silent and invisible to customers who pay it. Because the Grand Master of Taxes is against it, and if only in the sense that VAT is even more prone to lobbying abuse than our present system, it is not here a contender in the tax choice sweepstakes.

Tax Reform: Is Kinder, Gentler, Simpler, Fairer, Better?

Making the tax code fairer and simpler doesn't solve the problem. A major tax code overhaul in 1986 by the Reagan administration was to give a flatter tax in only two levels, 15% and 28%. These replaced the prior fourteen levels, from 11 to 50 percent, but eliminated many deductions, including non-mortgage consumer interest payments, state and local sales taxes. That 28% is now over 39%.

Rep Dan Schaefer, R-CO, calls the current income tax code "impossibly complex, overly intrusive and economically destructive. " He and Tauzin say the code "has grown from 14 pages in 1914 to over 2,000 pages of law, 6,000 pages of regulations, and hundreds of thousands of pages of rulings and interpretations in 1995," and the cost of compliance is staggering. "Americans spend more than 5.1 billion hours merely filling out income tax forms ... By some estimates, the cost of compliance exceeds $300 billion a year -- that's in addition to the $600 billion a year Americans also pay in taxes."

The National Federation of Independent Business says there have been 6,400 additions to the code since 1986 , which probably includes Summer of 1997's 824 changes. There are 17,000 pages of IRS regulations totaling 5.5 million words, and IRS spends $13.7 billion to enforce and oversee the code. NFIB's position is that the code should be abolished because it is too complex, expensive, punitive and unfair.

It's the Tax Code, Stupid

A lead editorial of the Rocky Mountain News concluded, "The fundamental problem is not the IRS. While bashing the IRS is good political fun and games, the core issue is how we tax ourselves and whether we would be better served by some form of national sales, consumption, value-added or flat tax. A fairer, flatter, simpler tax code would mean a leaner, more efficient and less contentious IRS. There is little reform of the IRS that will have lasting effects without reform of the tax code."

Columnist Jeff Jacoby says, "The Internal Revenue Service mirrors the tax code it is charged with enforcing. Both are immense, oppressive, inhuman, threatening ... the IRS will not change until the tax code is changed ... a drastic, wholesale contraction that shrinks the tax code to a fraction of its current size."

Rep Bill Archer, R-Tx, chairman of the powerful House Ways and Means Committee said, "I want to tear the income tax out by its roots so that it can never grow back again. I want to get the IRS out of the individual lives of all Americans."

Faint Support For Debate Against Radical Reform

Columnist Marianne Means said, "The IRS scare could become an excuse for radical reforms in the tax code that would otherwise never be taken seriously by most voters. A flat tax benefits mostly the rich, and so does a consumption-based tax. Those proposals should be debated on their merits rather than in an overheated atmosphere of IRS-bashing." Serious Tax Reform is Inevitable.

In an October, 1995 Reader's Digest poll, only 27% of 1,015 Americans asked said the taxes they pay are fair. They've known nothing else in their lifetimes.

Recipients were asked, "What is the highest percentage you think would be fair for a family making $200,000 a year to pay when you add all their taxes together?" There were no significant differences by party or philosophy, class, social strata, racial or sexual differences. Whether male or female, married or single, white or black, earning less than $30,000 or more than $75,000, Republican, Democrat, Independent, conservative, moderate or liberal, the answer was the same: 25%.Worded differently, what is "the highest percentage that you think would be fair for any family to pay in all their taxes combined, no matter how high their income?" the answer was 20%.

People actually pay almost double, 39%, for all taxes--federal, state and local. The article powerfully concluded, "there is in this country a sweeping and deeply held belief that we are all overtaxed."The survey was unique. "This consensus is the single most extraordinary finding in the history of domestic-policy polling in the United States," said Everett Ladd, a professor of political science and director of the Roper Center for Public Opinion Research. "America is probably the only country in the world where there are no significant differences by party or class in the 'ideal,' fair tax."

"These are exciting days for tax reform," says Bruce Bartlett , senior fellow with the National Center for Policy Analysis. "The good news is that only 25% of Americans back our current graduated tax rates, according to a poll by Opinion Dynamics for Fox News; 46% prefer a flat rate income tax ... 16% also favor a national retail sales tax ... Indeed, the support for a flatter tax system is so broad that Democrats are climbing on board ... ."

Choice Boils Down to Two of Three

A chart comparing the income tax, flat income tax and national sales tax has been furnished by Rep Dan Schaefer (R-CO).

There are really two choices, 17% flat tax at the paycheck, or 15% sales tax at the cash register.

Flat Tax Really Flat Income Tax

The flat tax is an income tax. By providing a generous exemption and eliminating virtually all deductions a family of four pays no income tax on its first $33,800 of income, and all income is taxed 17% only once . How long would the 17% last? About one session of Congress.

Individuals still with withholding are responsible to pay the tax on a postcard size form, on wages, salaries and pensions, with another postcard available for a business tax. Taxes on all other income -- interest, dividends, rents, royalties and business profits would be withheld and paid at the business level. Capital gains and estate (death) taxes are eliminated.

Records must still be kept, with the prospect of audits, verification and compliance. The IRS remains in place as the collection agency. History tells what Congress does to the flat tax we've had for over 60 years. Our flat tax on income called Social Security, has grown from 2% in 1935 to today's 15.3%. With no deductions or forms to fill out, the government simply gets the money before you do and spends it. For detailed information on the flat tax, contact Armey's website, www.flattax.house.gov.

Sales Tax: Paperless for People, Routine for Business

The national retail sales tax abolishes the IRS and repeals the personal and corporate income tax code, replaced by a 15% tax on all final sales of goods and services to customers. It treats all economic activity equally but provisions are in the legislation to give a credit up to the poverty level, making it tax free for lower income individuals. All imports are subject to the tax.

Taxes are collected from the final buyer by all businesses and sent to the respective state. The state forwards collected monies to the federal government. Both business and state are compensated for their efforts with a percentage of what they collect.

Businesses no longer have income tax compliance requirements. Since 45 of 50 states already have sales taxes, the mechanics involve several lines of accounting program code and another line item on their tax forms.

Some 265 million individuals will no longer fill out and file 16 million IRS forms , with no more expense and fear of audits, fines, liens, interest and penalties. April 15th is just another Spring day.

The sales tax has three attributes over the income tax. It is discretionery, anonymous and voluntary--private. You get all the money and decide how to spend, save, invest or give it away.

For detailed information on the national retail sales tax, contact Schaefer's website, www.house.gov/tauzin/

Fairness: A Big Issue

Fairness is in the mind of the beholder, and a contentious issue of tax reform. Today's tax fairness began with a German intellectual, Karl Marx. His second plank in the 1848 Communist Manifesto required, "A heavy progressive or graduated income tax," to form a "dictatorship of the proletariat." Through exploiting the politics of envy, the 16th amendment authorizing the income tax was declared ratified in 1913. Its fairness was based mainly upon ability-to-pay, sold on the idea of "soak the rich."

Examined carefully, tax fairness is more direct, being neither progressive or regressive but proportional. Daniel J. Mitchell explains , "The only reasonable definition of fairness is that everyone should play by the same rules--the very principle that underlies both flat tax and sales tax reform plans. Under the flat tax, a person who has ten times the taxable income of another would pay ten times as much in taxes. Likewise, under a sales tax, the rich person who consumes ten times as much as a poor person would pay ten times as much in sales tax."

Which Tax will It Be, Citizen Taxpayer?

So, which tax do you want and how will you choose? Excellent criteria abound, from Bill Archer, President Bill Clinton, nd small business, Jack Faris, president of National Federation of Independent Business, intent only on getting rid of the IRS code.

Archer says, "The ideal tax code must include five basic principles: fairness, simplicity, get at the underground economy, encourage savings and investment, and help our balance of trade.

President Clinton lists four questions for a tax-cut plan , "Is it fair to average American taxpayers? Is it realistic that you can implement the proposal, whatever it is? Will it be good for the economy as a whole; will it support our continuing growth of the economy? And will it be simpler?" The article concluded, "White House officials have said that the national sales tax and the flat tax would satisfy the fourth condition but fall far short on the others."

Faris' small business view says, "Tear down the IRS code." Replace it with a system with lower taxes, that fosters growth, is fair and simple to understand, neutral, visible and accountable, and stable. Taxtakers like the income tax.

Which one will taxpayers support?