By James K. Glassman
Americans are going to be apoplectic when they realize what a complicated mess politicians have created for them with the law they passed earlier this year. And, thanks in part to the strong economy, individuals are paying more and more in taxes. The Tax Foundation estimates that taxes (federal, state and local) will amount to 35.2 percent of net national product this year the most in history.
What we need is both a simpler, fairer tax code and an overall reduction in what the government takes. There are two serious options on the table:
(1) A flat tax, favored by Majority Leader Dick Armey (R-Tex.) and presidential candidate Steve Forbes. It would grant a personal exemption of about $30,000 for a typical family, then tax everything above that at 17 percent, with no deductions.
(2) A national sales tax, favored by Ways and Means Chairman Bill Archer (R-Tex.) and Sen. Richard Lugar (R-Ind). It would eliminate the income tax entirely and tax only consumer purchases of goods and services at a rate of around 15 percent.
The country is ready for a big change. A survey last month by Opinion Dynamics for Fox News found that 46 percent of Americans favored a flat tax, while 16 percent wanted a national sales tax and just 25 percent wanted to keep the current system.
One reason people favor the flat tax is that they don't know much about the national sales tax. That may be changing as Rep. Billy Tauzin (R-La.), a witty Cajun who is a ferocious debater, travels the nation in a high-spirited battle with Armey. In addition, Sen. Phil Gramm (R-Tex.) told me he's now leaning toward a sales tax.
How to resolve the argument? My own solution is to do both. Scrap the current tax code and replace it with: an 8 percent flat tax on income plus an 8 percent national sales tax. Call it "8 and 8 in '98."
The beauty of this arrangement is that the low rates on both eliminate the pitfalls of having one tax or the other. At the same time, the minuscule rate on income increases incentives for people to work more and save more, boosting investment and overall growth.
Under 8 and 8, politicians would be deterred from loading up either tax with special-interest deductions and credits. There's no need for breaks if the tax bite is tiny. If the annual interest payments on your home loan are $16,000, taxes are currently reduced by as much as $6,300, thanks to the mortgage deduction. But with an 8 percent tax rate, the deduction would be worth only $1,300.
Armey's flat-tax plan creates serious political problems on the fairness front by eliminating taxes on dividends, interest, capital gains and estates. But with a rate as low as 8 percent, you could retain those taxes (if you had to) and still reap positive economic effects.
Meanwhile, a sales-tax rate of 8 percent is so low that it probably won't hurt compliance, as a 15 percent tax would. Also, with a pure sales tax, some kind of rebate would be necessary to low earners, but the personal exemption on the income-tax portion of the 8 and 8 plan takes care of that problem: Low earners would pay no income taxes.
When I ran the 8 and 8 idea by Tauzin yesterday, he offered another variation: a single-digit sales tax (say, 8 percent) plus a tax on business income that would be less than 17 percent. "We have to get rid of the income tax on individuals," he said. But he's open to keeping an income tax on corporations, partnerships and sole proprietorships a tax which, of course, would be passed on to individuals but not collected from them. Not a bad idea.
Archer, however, detests the notion of both an income and a sales tax even if it's very low and so does Gramm. As flat-taxer Dan Mitchell of the Heritage Foundation puts it, "The big concern is that politicians will have two revenue sources, and, all of a sudden, you're France." In France, Germany and Italy, the top personal income tax rate exceeds 50 percent and the value-added tax (a VAT, or hidden sales tax) is 18 percent.
A VAT, admittedly, is a disaster since it's not transparent. But if everyone in America faces precisely the same rate on income and consumption, then a hike in those rates would be a dramatic political event far more conspicuous than the internal fiddling that goes on now.
That fiddling, of course, also tends to help targeted interest groups, whose contributions to politicians attempt to influence tax policy above all else. Get rid of the need for those donations with the 8 and 8 plan, and you'll have campaign reform as well as tax reform.
Supporters of comprehensive tax reform will have to move quickly. Reform is much more attractive if it's coupled with an overall reduction in tax revenues and such a cut is urgently needed. If the economy continues to hum, the federal budget will almost certainly produce a surplus next year. Congress and the president will be only too happy to spend it and more. So, to keep government from growing, we need to deny politicians the cash.
Instead of 8 and 8, maybe we should think about 6 and 6.
© Copyright 1997 The Washington Post Company