March 25, 1996

March 25, 1996 | Commentary on Taxes

ED032596b: A Tax Code To Love?

Don't look now but it's that time of the year again. The dreaded tax season is here. To say that most Americans don't like the current tax system understates the obvious.

That's because it truly is a mess. Americans struggle to comply with a tax system that has more than 400 different forms. The amount of time individuals and businesses spend collecting all the needed data and filling out all the required forms: an estimated 5 billion hours each year. What a waste!

And compliance isn't cheap. Individuals, families and businesses spend an estimated $200 billion per year on accountants and lawyers to satisfy the Internal Revenue Service. Just think how crazy that is: The government will throw you in jail if you don't pay taxes according to a scheme it has made so confusing you have to hire a lawyer to figure it out!

There has to be a better way. And there is.

By now I'm sure you've heard all sorts of claims about an idea that is frequently discussed by economists, realtors, policy-makers and presidential contenders alike: the flat tax.

Just so you know, the reason so many people in high places want you to reject the flat tax is because they are the ones leeching benefits from the current system, and they don't want anybody messing with their cash cow.

The flat tax works like this: All taxpayers would pay the same tax rate, for example, 17 percent. No confusing tax schedules, no steep accountants fees; just one form, the size of a postcard. The rich would pay far more in taxes than the everybody else -- contrary to critics' claims -- since, after all, 17 percent of a million dollars is a lot more money than 17 percent of $35,000.

A study by my colleagues at The Heritage Foundation recently showed that the flat tax proposed by House Majority Leader Richard Armey, R-Texas, and Sen. Richard Shelby, R-Ala., -- one of several proposals under consideration -- would lower taxes on all income groups, especially the poor and middle class. The plan's generous deduction, $33,000 for a family of four, would exempt most low-income households from any federal income tax. Some 24 million families that pay taxes now would pay none under the plan.

Also, unlike the current system, which may tax the same dollar up to four different times (the personal income tax, the corporate income tax, the capital gains tax, and the estate tax), dividend and interest earnings from savings and investment would not be taxed. In other words, instead of being penalized for investing your money, you would be taxed just once 3/4 when you earn the money.

This would encourage more Americans to put their money to work in the economy -- and instead of dragging the economy down, the tax system would start revving it up.

Of course, one of the most attractive features of a flat tax is its simplicity. Everyone who has wrestled with a Schedule C or a 1040 form or has had to collect receipts for every charitable contribution in the mad rush to get everything in the mail by April 15 could simply -- and quickly -- fill out a postcard-sized form. What literally once required hours could be done in a few minutes during your lunch hour!

But before you get too excited, remember: A lot of special interests don't want to part with the advantages (a tax break for this, a loophole for that, a deduction here, an allowance there) that the current tax system gives them.

Practically everyone agrees that America's tax system needs a major overhaul. Instead of spending precious time cursing the tax code, perhaps our lawmakers will soon replace it with one that everyone (except the special interests, of course) can love.

Note: Edwin J. Feulner, Ph.D. is president of The Heritage Foundation, a Washington-based public policy research institute.

About the Author

Edwin J. Feulner, Ph.D. Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Founder's Office

Related Issues: Taxes