October 25, 2005

October 25, 2005 | Commentary on Taxes

Flat-Out Smart

Imagine a law that affected everyone in the country but was so confusing that only a select few could understand it. And those select few didn't even include the people who enforced the law.

That may sound like a recipe for disaster. Actually, it's a description of our current tax policy.

Almost 900 tax forms are in use today. It takes more than 60,000 pages of laws, regulations and IRS rulings to explain how we are supposed to fill out those forms. According to the National Taxpayers Union, the average American needs more than 28 hours to complete a 1040 form, a collective waste of some 6 billion hours.

And because so many worry about making a mistake, more and more people turn to professional preparers. Almost two-thirds of Americans now pay someone else to do their taxes.

We can fix this. But will we?

The president's panel on tax reform is due to release its recommendations soon. Almost anything it suggests is likely to be an improvement -- how much worse could the system possibly get? But as long as we're going to try to fix the tax system, we ought to do more than make small changes around the edges. It's time to implement a flat tax.

A flat tax would be simple. There would be a set rate, say 17 percent, which all citizens would pay. We could toss out all the forms and regulations. An individual's return could be filed on a simple postcard, which would take minutes, not hours, to fill out.

It also would be fair. Our current system is so loaded with credits, deductions and exemptions that virtually nobody can understand it. Even IRS employees frequently get things wrong. A 2001 study found that when taxpayers called the IRS for advice, they got the wrong answer almost half the time.

A flat tax would help fuel our already booming economy as well. One Harvard economist estimates tax reform could boost national wealth by nearly $5 trillion. That's because, under a flat tax system that doesn't punish people for saving and investing, everyone's assets would be worth more.

Then there's the benefit of all the time and money we'd save. Americans today spend more than $100 billion on lawyers, accountants and tax preparers. That money would be far better invested in 401(k)s, bonds and homes.

Our current tax code is a disaster, but it's no accident. For decades, politicians have used it to attempt to shape personal behavior. Washington wants you to drive a hybrid car, so it will give you a tax deduction when you do. Washington wants to promote renewable fuels, so it gives tax breaks to manufacturers. And on and on and on, for thousands of pages.

But it's really none of Washington's business what type of car you drive or what type of fuel you put in it. Under a flat-tax system, Washington would go back to minding its own business.

And in a blow for fairness, a rich person who earns 100 times what the average person makes would pay 100 times as much in taxes as the average person. Wiping out the deductions would make the system transparent and fair.

At the same time, one critical loophole would be retained. Every household would still receive a large exemption based on family size. A family of four, for instance, would pay no taxes on its first $30,000 in earnings. That will protect middle-class Americans against a tax increase under the new system.

Sometimes, in politics as in football, you have to throw deep to make any progress. A flat tax is a big idea that would change the system for the better. The presidential panel ought to recommend it and fight politically for it. Anything less would be a missed opportunity.

Ed Feulner is president of The Heritage Foundation (heritage.org), 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