COULD IT BE that--after decades of learned study, presidential commitment and general hand-wringing all around--the time for tax reform has come? Senate Finance Committee Chairman Robert Dole has given life to the possibility. Later this year his committee will hold hearings on proposals to replace the individual income tax--with all its preferences and exclusions--with a flat low- rate tax.
Last year the tax system headed in a different direction. The big tax-cut bill provided new gimmicks by which cagey taxpayers could further reduce their burden. Dispensing favors through the tax machine is nothing new, but this time warning lights started to flash. The public, it seems, is thoroughly fed up with a tax system that is not only of baroque complexity, but also downright arbitrary in impact. Replacing the system with a low-rate tax on income-- with few, if any, exclusions allowed--is an idea that, by promising efficiency, equity and simplicity, appeals to all parts of the political spectrum.
The flat tax is not, of course, without its critics. The dozens of tax preferences that the system would chop down didn't just grow spontaneously. They were planted and nurtured by substantial interests--none more powerful than the members of the tax-writing committees who know full well the political leverage that comes from the ability to deliver favors redeemable in cash at tax time.
More high-minded opponents of the flat tax will note that the current system, for all its flaws, is at least moderately progressive. A well-off person is certainly able to share more of his last dollars with the government than a poor person, and a decent tax system will take account of that fact. But there are ways to introduce progressivity without complexity into the tax system--none better than the negative income tax long espoused by conservative economist Milton Friedman.
The progressivity of the current income tax is, in any event, bought at enormous price in inefficiency and unfairness. In 1979, for example, about 20,000 taxpayers with adjusted gross incomes of more than $100,000 paid income taxes of more than 40 percent on that income. Remember that adjusted gross income already excludes many tax preference items, but still these families paid hefty taxes. Another 20,000 families in the same high income bracket, however, paid income taxes of less than 15 percent of that income.
In fact, in the upper ranges of the tax system, what you pay depends mostly on how good is the tax advice you get. This, rather than the general level of taxation, is what irks the average taxpayer most--the sure knowledge that other people in equal or better circumstances are beating the system, and doing it in ways that the system condones and even encourages.
Simplifying the tax code can release the talents and energies that are now diverted into figuring out tax avoidance schemes and counseling others in their use. And the loopholes in the tax law are now so spacious that eliminating them can produce higher revenues with far lower tax rates. Congress needs to raise more taxes to close the federal deficit and finance the defense buildup. The administration won't support more than token tax increases for fear that higher rates will stifle incentives for productive work and investment. Tax reform is the perfect compromise.