Tax Code Reform

The tax code needs a reform. It won’t be easy with all of the special interest groups. The article below by Robert Freer spells out some of the options that needs to be looked at.

By Robert E. Freer, Jr., President of The Free Enterprise Foundation

“That there shall be levied, assessed, collected and paid annually upon the entire net income in the preceding calendar year… a tax of two percent….” Writing in 1916, Congress in this fashion introduced the first constitutionally sanctioned direct income tax on our citizens. It was felt that a direct income tax was essential to satisfy the enlarged appetite of the federal government for revenue to meet the expanded need that came with America’s new position as a major power on the world scene. An additional element was the effect of the record flow of immigrants in the previous 30 years to fill thousands of jobs in industries transforming the country. Assistance programs newly fashioned to provide help to those left behind in the country’s mad dash from a predominantly rural to an urban economy and from agricultural to industrial were a humanitarian necessity.

The clouds of war soon transformed this federal appetite for revenue into a lust that saw the modest rates of 2-16% of 1916 rise to a high of 77 percent in 1918 as we were transformed into an arsenal for democracy. It can be noted that the US budget in 1917 almost equaled the entire sum appropriated by the Federal government since 1789. Revenue increased from $761 million in 1916 to $3.6 Billion in 1918, yet even with this startling growth, only 5% of the population paid income taxes. Regrettably the end of war did not bring a drastic change in tax policy.

Congress once bitten by the tax bug has been unsuccessful in its several previous attempts to achieve the fairness and simplicity that should be the public’s right. While there isn’t agreement as to what to do about it, most observers would agree that the tax code now consuming more than 21 megabytes and 2.8 million words has lost all rationality and seeks to fulfill social engineering goals far distant from simply meeting the nation’s revenue needs. In addition to the code, implementing regulations further confuse matters by arcane requirements that have generated as many as 250 pages of implementing regulations for just one paragraph. Is there any question that we are well beyond the time to scrap the present code and start over?

I think not, but the thousands of individuals and businesses who are advantaged by the code already or have the ability to bend the code to their advantage have up until now made fundamental reform impossible. They would not have been so successful if the general public had not shrugged its shoulders, muttered something about “death and taxes” and looked the other way. The current code and its implementing regulations need to be cast aside because they are a threat to our continued prosperity as a trading nation. They are whimsical in their application, costly in their collection and administration, confusing to tax payers, and they erode the spirit of voluntary compliance that has characterized us as a nation.

If we cease being stand aside enablers of tax code irresponsibility, maybe, just maybe we can see real reform in the next several years. The president has appointed a bipartisan commission to report back to him in July of this year. While the “smart money” believes they will come back with recommendations for halfway measures, Congress may finally be serious about pushing ahead with fundamental reform. Bill Thomas and the Ways and Means Committee have a serious bill HR 25, The Fair Tax Act of 2005, before them that repeals the income, employment, estate and gift taxes and replaces the Internal Revenue Code in its entirety with provisions imposing a 23% national sales tax on the use or consumption in the United States of taxable property or services. The bill provides for exemptions from the tax for business related activities and for State government functions and makes provision for the states to collect the new taxes as part of their own sales tax activities. Significant allowances and rebates are provided that would provide a direct subsidy to needy families to assure that no family receives less than is needed to exceed the poverty level. The principle competing proposal for tax reform calls for the imposition of a single flat rate income tax of 17% with exemptions that would have the effect of excluding the first $46,165 of income for a family of four. Both proposals would drastically curtail the administrative complexity of tax collection and create fairness in assuring that similar taxpayers pay the same.

I have a personal preference for the flat tax because it includes an annual process for each citizen to file their single page return. This simple act reinforces the sense of being a full participant in our democracy. In expressing a preference, I should say, however, that the national sales tax would be the more efficient and less costly to implement. As a political matter, neither approach is likely to develop the consensus required unless they are modified to assure that home ownership for an adequate single family residence is encouraged and that charitable giving is not discouraged. Total giving which in some significant measure is a reflection of tax preference totaled $241 billion in 2003. Similarly home ownership, also at a record high has been traditionally encouraged by the Code and some method needs to be devised to do so without destroying the new code’s simplicity or forcing a significant rise in the rate of taxation.

Copyright © 2007 by Robert E. Freer, Jr. All rights reserved

About the author: Robert E. Freer, Jr. is President of The Free Enterprise Foundation. He is a Visiting Professor, at The Citadel and elected in 2005 to be their first John S. Grinalds Leader in Residence. A regular contributor to the Mercury, He can be reached by E-mail at The Citadel . Copies of his earlier columns can be found The Free Enterprise Foundation.

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