The power to tax involves, as Chief Justice John
Marshall said, the power to destroy. So does the power of tax reform, which is
one reason why Rep. John Linder, a Georgia Republican, has a 133-page bill to
replace 55,000 pages of tax rules.
His bill would abolish the Internal Revenue Service and the many billions of
tax forms it sends out and receives. He would erase the federal income tax
system -- personal and corporate income taxes, the regressive payroll tax and
self-employment tax, capital gains, gift and estate taxes, the alternative
minimum tax, and the earned-income tax credit -- and replace all that with a
23 percent national sales tax on personal consumption. That would not only
sensitize consumers to the cost of government with every purchase, it would
destroy K Street.
"K Street" is shorthand for Washington's lawyer-lobbyist complex. It
exists to continually complicate and defend the tax code, which is a
cornucopia from which the political class pours benefits on constituencies. If
the income tax were replaced -- Linder had better repeal the 16th Amendment,
to make sure the income tax stays gone -- everyone and all businesses would
pay their taxes through economic choices, and K Street's intellectual capital,
which consists of knowing how to game the tax code, would be radically
depreciated.
Under his bill, he says, all goods, imported and domestic, would be treated
equally at the checkout counter, and all taxpayers -- including upward of 50
million foreign visitors annually -- would pay "as much as they choose,
when they choose, by how they choose to spend." And his bill untaxes the
poor by including an advance monthly rebate for every household equal to the
sales tax on consumption of essential goods and services, as calculated by The
government, up to the annually adjusted poverty level.
Today the percentage of taxpayers who rely on professional tax preparers is at
an all-time high. The 67 percent of tax filers who do not itemize may think
they avoid compliance costs, which include nagging uncertainty about whether
one has properly complied with a tax code about the meaning of which experts
differ. but everyone pays the cost of the tax system's huge drag on the
economy.
Linder says Americans spend 7 billion hours a year filling out IRS forms and
at least that much calculating the tax implications of business decisions.
Economic growth suffers, because corporate boards waste huge amounts of time
on such calculations rather than making economically rational allocations of
resources. Money saved on compliance costs would fund job creation.
Corporations do not pay payroll and income taxes and compliance costs; they
collect them from consumers through prices. So the 23 percent consumption tax
would allow taxpayers to stop paying the huge embedded cost of corporate
taxation. Linder says the director of the Congressional budget Office told him
it costs individuals and businesses about $500 billion to remit $2 trillion to
Washington. And studies show that it costs the average small business $724 to
collect and remit $100.
In 1945 corporations paid more than one-third of the government's revenue. Now
they pay only 11 percent, because corporations, especially multinationals, are
voluntary taxpayers. In a world increasingly without borders that block
capital movements, corporations pay where the burden is lowest. Linder says $6
trillion in offshore accounts would have an incentive to come home under his
plan.
Furthermore, by ending payroll and corporate taxes, the United States would
become the only nation selling goods with no tax component -- such as Europe's
value-added tax -- in their prices. With no taxes on capital and labor,
multinationals would, Linder thinks, stampede to locate here, which would be
an incentive for other nations to emulate America. "This," Linder
says, "would unleash freedom around the globe."
Critics argue that ending the income tax, with its deductibility of charitable
contributions, would depress giving. Linder says: Piffle. In 1980, when the
top personal income tax rate was 70 percent, a huge incentive for giving,
individual charitable contributions were $40.7 billion. In 1986 the top rate
was reduced to 28 percent, and by 1988 charitable giving was $86.7 billion.
The lesson, says Linder, is that we give more money when we have more money.
When Speaker Dennis Hastert published a book last year, he was startled to
find that interviewers were most interested in talking about Linder's bill,
which then had 54 co-sponsors. This year Hastert added Linder to the Ways and
Means Committee. Linder cheerfully says his bill would reduce Ways and Means
to "a B committee" by ending the political fun of making the tax
code ever more baroque for the benefit of K Street's clients. Bliss.
