Great article from Steve Forbes concerning the flat tax. I pesonally would like very much to see a change to a flat tax. I don’t think it will happen soon though due to the fact that politicians (both demacrats and republicans!) love to complicate things. To them if it sounds simple and effective it must be bullshit!
If the government is truly concerned with increasing it’s revenue then they should seriously consider this.
My name is Bigflamer and I endorse this message.
Fact and Comment
Steve Forbes, 06.06.05, 12:00 AM ET
On May 11, I testified before the President’s Advisory Panel on Federal Tax Reform. This body, headed by former U.S. senators Connie Mack (R-Fla.) and John Breaux (D-La.), will render its recommendations by July 31. To help prod the debate for real change, I have written a book, Flat Tax Revolution: Using a Postcard to Abolish the IRS, which will be published by Regnery on the Fourth of July.
Mr. Chairman: Two basic issues need to be addressed in any discussion on federal tax reform: the complexity of the tax code itself and the burden imposed on the economy by unnecessarily high tax rates.
There isn’t a human being alive who knows what’s contained in the federal tax code. To put it in perspective: Abraham Lincoln’s Gettysburg Address, which defined the American nation, is 272 words in length. Our Declaration of Independence is some 1,300 words. The Bible, which spans several thousand years of human history, is 773,000 words. But the federal tax code, with all of its attendant rules and regulations, is 9 million words and rising.
Since 1986, when the last serious attempt at tax simplification was made, the code has been amended 14,000 times. Its length has grown by 3 million words–an avalanche of personal and business deductions, exemptions, preferences, loopholes, credits and exclusions spread out over six formal tax brackets (and an infinite number of other brackets as deductions are phased out when taxpayers reachcertain income thresholds). And then there’s the abomination known as the alternative minimum tax–an Orwellian name for a levy if ever there was one. A more accurate name would be the compulsory maximum tax.
A typical taxpayer filing the regular Form 1040 and reporting income from work, dividends and capital gains will spend an estimated 26 hours and 48 minutes each year completing his return. Seventeen years ago it took only 17 hours and 7 minutes. That’s a 57% increase in just the past 17 years.
Billions of hours of lost productivity–the equivalent of3.3 million full-time jobs–are squandered on tax compliance. At last count, Americans spent a staggering 6.6 billion hours preparing their tax forms. Not surprisingly, a recent AP poll that found that seven in ten people believe federal taxes are too complicated.
It’s bad enough that taxpayers are thoroughly confused by the system, but even seasoned tax professionals are frequently confounded by the code’s jumble of regulations. And the code is made all the more confusing with its contorted phaseouts, clawbacks and AMT.
Why the Tax Code Beast Must Be Killed
Twenty years ago President Ronald Reagan signed the Tax Reform Act of 1986, which swept away numerous tax loopholes and instituted a two-bracket system. Because of the reform the tax shelter industry suffered a heavy loss. But within only a few years it returned with a vengeance. By the 1990s the code had once more become a rule-encrusted thicket, giving rise to a proliferation of what are referred to as “abusive” tax shelters, convoluted entities and transactions created for the sole purpose of avoiding taxes. Since 1993 the government has lost $85 billion in tax revenue because of these abusive tax shelters.
A flat tax would eliminate the possibility of clever minds setting up complicated tax-avoidance schemes. The code would be too transparent, too simple to hide tax liabilities. A flat tax is the only way to end the clutter, confusion and distortions of the current system. Clamoring for smarter tax software, better-trained IRS staff and targeted tax cuts won’t solve our tax problems.
Simple and Fair
A flat-tax form could be printed on a single sheet of paper or in a postcard format. Exemptions for individuals and children would be expanded so that a family of four would pay no federal income taxes on its first $46,165 of income. Anything over $46,165 would be taxed at a fair and flat rate of 17%. Millions of people would be off the federal income-tax rolls.
There would be no tax on Social Security benefits. No tax on personal savings. No capital gains taxes. And small businesses and family farms wouldn’t have to worry about being wiped out by the death tax–no taxation without respiration.
Business taxation would be equally simple: a 17% rate on profits; deductions for salaries and the costs of materials and services necessary to produce the company’s goods and/or services; and immediate expensing of investments–no more depreciation schedules. If there was a loss, you would carry it forward to apply against future profits.
Taxpayers would have a choice. They could opt for the new flat tax or they could file under the old system. This type of dual system is being used successfully in Hong Kong. People would be able to see for themselves which system is better–the flat tax or the old system. Given the choice, most people would opt for a simpler system.
Stronger Economy, More Federal Revenue
The low tax rate would set off an economic boom by letting people keep more of what they earn and by lowering barriers to risk taking. Every time the tax burden on the American people has been reduced, better-paying jobs and new businesses were created, incomes rose, and the standard of living improved. But those weren’t the only benefits: Lower taxes also drove government revenues up, not down.
When President John F. Kennedy enacted across-the-board tax reductions, including dropping the top tax rate from 91% to 70%, the economy boomed. Federal receipts mushroomed. Something very similar happened as a result of the Reagan tax reductions and again from the tax-rate reductions enacted two years ago on capital gains, dividends and personal income.
This brings us to the absurdity of static analysis, which assumes that changes in tax rates have little or no impact on our behavior. Think of it this way: If people’s incomes were taxed at 100% on Mondays and a zero percentage rate on Tuesdays, how many people do you think would show up for work on Monday? Washington’s static analysts, mired in their rigid, wrongheaded theories, would swear up and down that attendance would be the same on Mondays as it would be on Tuesdays.
When Congress increased the capital gains tax levy in 1986, the so-called experts at the Joint Committee on Taxation estimated that this tax increase would increase capital gains revenues. Wrong. Tax receipts plummeted.
By contrast, when President Clinton agreed with congressional Republicans in 1997 to cut the capital gains tax rate from 28% to 20%, critics wrung their hands, predicting revenues would drop and deficits would increase. In fact, revenues from capital gains increased dramatically.
As a result of static analysis, revenue loss from tax cuts tends to be overstated, which makes it harder to enact tax cuts.
To conclude, Mr. Chairman, the monstrosity of the tax code we have today has created a problem of monstrous proportions. And like every big problem, it requires a big solution. Fiddling around the margins of the tax code won’t do the trick. A simpler, fairer flat tax will.
We already know flat taxes work because they’ve been enacted in Hong Kong, Russia, Lithuania, Latvia, Estonia, Ukraine, Slovakia, Romania, Serbia and Georgia. Other nations are actively considering their own versions of a flat tax. What are we waiting for–especially now, when the rest of the world, including India and China, is determined to catch up with us?
I want to thank this committee for allowing me to testify today, and I want to applaud you for your courage in taking on this very important issue.