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Taming the Tax Code

By Sheldon S. Cohen
Sunday, August 27, 1995; Page C09


Recently former commissioner of internal revenue Shirley Peterson and Chairman of the Ways and Means Committee Bill Archer recommended repeal of the Internal Revenue Code and suggested we start again. Their concern is with the complexity of the present system. I will not disagree with their desire for a simpler tax code. Indeed, most of the world would like a simpler life, which we rationalize that we had just a few years ago. I venture to say a close analysis will prove that the "good old days" of simpler times were not that good.

Edmund Burke, the English parliamentarian who was a friend of the American colonials in the Revolution wrote: "To tax and to please, no more than to love and be wise, is not given to man." He was right then -- and he is still right. The late Joseph Pechman, director of economic studies at the Brookings Institution, developed a low-rate, progressive and simple income tax plan back in the 1960s. The problem is not in design but in enactment and maintenance. A simple tax may not work in a complex world – unless we are willing to accept very arbitrary lines and rules.

I can remember, when I was in office, sending a bill that was less than a page long to Congress to suspend the investment tax credit. When the bill was enacted it was 30 to 40 pages in length. Why? Because Congress saw some inequities in withdrawing the credit for articles ordered before its repeal was proposed and in cases where the taxpayer could show a reliance on the existing law to finance the capital acquisition. The exceptions were mostly fair – but took pages to describe.

Why, we could ask, is Congress next year or the year after that going to act differently from the way it does at present – or has in the recent past? The members see what they perceive as unfairness and try to introduce equity into the law. When that happens, it requires a great deal of line drawing and definition – each relief of an inequity adds more verbiage and thus more complication to the code.

It is odd that many of those who applaud social and economic legislation in the so-called Contract with America are the same people who want a simple tax. The various credits, deductions etc. of the contract are not simple – and they add to the complexity of the present tax return. But the complexity is added by trying to use our tax code to accomplish social objectives. The more we do, the more complicated it becomes. Thus, to simplify our tax code – and keep it simple -- Congress needs the discipline to resist using the tax code for social legislation. It must not try to right every wrong in the world by deduction, credit or otherwise. Those who oppose central economic planning seem to feel it is different to add a deduction or credit for their favorite social or economic purposes. It's not. It is centralized planning in disguise.

Progressive rates do not add complication. There is really only one multiplication no matter how many rates are used. All the rest is simple adding and subtracting. Flat-rate structures merely are an excuse to transfer the tax burden to the middle- and low-income groups.

Everyone on the conservative side of the issue cites his favorite economic text – "Wealth of Nations." Adam Smith also said: "It is not very unreasonable that the rich should contribute to the public expense not only in proportion to their revenue, but something more than in that proportion." Abraham Lincoln agreed; he proposed the first progressive income tax in the United States.

We live in a global economy. Manufactured goods or their components flow freely across international borders, and so do financial instruments of many sorts. Many of these goods and instruments were unheard of just a few years ago. The system of foreign tax credits and tax treaties is now completely international. We need to take account of commerce within the tax system too. How will a new system adjust to these realities?

Every other developed country of the world has both an income tax and some form of consumption tax. (We do also; the states impose the sales taxes here.) Indeed, in most of the countries where the value-added tax (VAT) or a similar tax was introduced, the government had a crisis or fell. It fell because there was an immediate spike in inflation. Thus, a VAT of 10 percent or 20 percent will cause an immediate rise in prices of a corresponding amount. Even if the income tax were to disappear at the same time, this would be so. Over time, things may even out – but as Keynes said: "In the long run we will all be dead." The trick is to live in the short run and build a system that can constructively work in the long run.

Perhaps a simple illustration of complexity in action will help. Many years ago I was in Chile to help with their tax system. Driving from the airport, I saw a small French automobile with a sloping back. On the rear was a 3-by-3-foot platform. I asked what it was. "It's a truck." You see, the excise tax on automobiles was 200 percent, while the tax on trucks was only 30 percent. This illustrates that business people will "game" any system – so drafting must be carefully done. Since business is so diverse, this ensures that the system will never be as simple as the critics would like.

We have a tax code that works. It brings in our revenue at the lowest cost of administration in the world. We are the lowest taxed of the developed countries of the world. Our tax system (federal, state and local) accounts for about 30 percent of the gross domestic product. The Japanese, Germans and British all tax a larger slice of the economy. Indeed, foreign business is constantly moving into the United States. The tax does not drive them away.

The perfect tax system will elude us. The enemy of better is best. We have a system that works. With a little discipline, Congress could simplify it, reduce deductions and credits and make it better. If we just junk the present system, we then need a very complex system to bridge to a new system. Illustration: In a consumption tax, the 20- to 30-year-olds have no problem. They are starting in the new system. How about the 60-year-olds? They saved money over time. Now with a consumption tax, they are taxed a second time. That problem would likely create a relief provision if it were enacted. Such a relief provision would not be simple.

The writer was commissioner of Internal Revenue Service from 1965 to 1969.

© Copyright 1995 The Washington Post Company

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