A Taxing Debate


A Taxing Debate

Oct 26th, 2000 3 min read

Former McKenna Senior Fellow in Political Economy

Daniel is a former McKenna Senior Fellow in Political Economy.
It's easy to predict who will win this election: lawyers, lobbyists, accountants and anyone else who owes his job to the U.S. tax code.

Why? Because the two presidential candidates are sparring over the size of their respective tax cuts and missing an important opportunity to discuss how to simplify and reform our tax system. Which, of course, is just fine by the special interests that anticipate new complexities being added to the code no matter who wins.

This is not to say Vice President Al Gore and Gov. George W. Bush are debating trivial matters, particularly since the budget surplus is expected to exceed $4.5 trillion over the next 10 years. The amount of tax relief we get will inevitably affect economic growth and international competitiveness.

But what about the complexity of the tax code? The IRS's Web site has 238 different publications and 679 different forms that can be downloaded. This endless spool of red tape helps explain why the tax code is a nightmare of confusion that imposes more than $200 billion in compliance costs every year.

Bush plans to cut tax rates across-the-board and jettison the death tax, but does little to reduce the number of tax forms and publications. And what about the vice president? He wants 80 new tax increases and about three dozen targeted cuts. These changes may be good, or they may be bad, but nobody is telling us about the new tax forms they will require or the additional IRS agents that will be needed to enforce these changes.

Another issue drowning out the case for simplification is whether there should be tax cuts for "the rich." Gore complains that the wealthiest 1 percent will get 30 percent of the GOP tax cut. Bush responds that the top 1 percent already pay one-third of the tax burden. But this is a silly debate for two reasons.

For one, both candidates are forgetting a primary lesson of the 1980s. Ronald Reagan reduced tax rates dramatically, slashing the top rate from 70 percent in 1980 to 28 percent in 1988. Then, as now, there was a debate over whether this cut was "too big."

So what happened? According to IRS data, lower tax rates actually increased tax collections from the rich. The top 1 percent went from paying 17 percent of the tax burden in 1980 to paying 27 percent by 1988. Supply-siders were right: Lower tax rates reduced the incentive to hide, shelter and under-report income. Paradoxically, the best way to soak the rich is to cut their tax rates.

But the "tax-cuts-for-the-rich" debate is foolish for a second reason. It distracts policymakers and voters from discussing ways to simplify the tax code, a reform that is urgently needed. Not long ago, Money magazine did a survey, sending a hypothetical family's tax return to professional tax preparers. They got back 46 answers, all of them different and all of them wrong. Most of these tax experts missed the mark by thousands of dollars - usually in the government's favor.

The candidates would perform a valuable service for voters if they would simply tell us whether their tax plans would make the tax system more understandable. An even better idea might have been to cancel one of the debates and instead require the candidates to fill out a typical family's tax return.

After all, one reason the tax code is so complicated is that almost all politicians pay someone else to calculate their taxes. Needless to say, they might be more sympathetic to cries for reform if they had to endure the agony and uncertainty that many families go through every April 15.

"The hardest thing in the world to understand is the income tax," Albert Einstein is reported to have said. One can only imagine what he'd say if faced with today's tax code. Not only is the system more intrusive and complex, it also is a moving target. There have been more than 6,000 changes in tax law, for instance, since the 1986 Tax Reform Act. That may be great news for lobbyists, but it has been bad news for taxpayers struggling to keep up with new rules and file accurate returns.

With any luck, lawmakers eventually will agree to scrap the current code and replace it with a simple and fair flat tax that treats everyone equally. But until then, all we can hope for is that they don't make things even worse.

Daniel J. Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation.

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