Benjamin Franklin once said, "In this world nothing can be said to be certain, except death and taxes." Today, Americans are reminded of the unfortunate accuracy of Franklin's words as millions rush to file their personal income taxes. But the real tragedy is the tax system itself, which has grown grossly unfair and overly complex and hinders economic growth. No longer is the tax code used to collect income for the government. Instead, it has become a tool for redistributing wealth. The current federal tax system should be eliminated and replaced with a system that is simple, reasonable and promotes growth -- the flat tax.
The Tax Foundation, a nonpartisan organization, estimated conservatively that in 2001, approximately $140 billion and 4.6 billion hours were spent on the compliance costs and paperwork requirements associated with filing income taxes. The amount of forms and manuals to explain how to use the forms is dizzying. Amazingly, the simplest tax form, the 1040EZ, still requires more than thirty pages of instruction. A complex tax code leads to increased amounts of exploitation and tax evasion.
The current federal tax system is also grossly unfair to Americans at all income levels. Owing to the progressive nature of income tax brackets, the most entrepreneurial Americans have much higher marginal tax rates than do others. But these Americans use the same roads and are defended by the same military as those with lower marginal tax brackets. The current progressive tax brackets are also unfair to the lower and middle class due to bracket creep. Bracket creep occurs when a taxpayer moves into a higher tax bracket because inflation has increased their nominal, and not their real, income.
It is estimated that in 2003, the average American family will have to work until April 19 just to pay their federal, state and local income taxes. Taxes amount for such a large share of a family's budget that often little is left for savings, investment and charitable donations after essentials such as food, clothing and shelter are paid for. And those who do decide to save or invest are punished by capital gains taxes, the death tax and the double taxation of dividends. The worrying trend of less job creation, smaller family incomes and sluggish income growth can be reversed, but not in the current tax environment.
Under a flat tax plan, all Americans would pay the same rate of 17 percent on all their taxable income. However, provisions would be built in so that a family of four would pay no income tax on the first $33,000 of their income. All Americans would fill in the same postcard for their taxes; there would no longer be dozens and dozens of pages of personal income tax returns to fill out. A flat tax plan would strike all deductions, loopholes, credits and exemptions.
The simple logic of a flat tax plan shows why it would be much more effective than our current system. People would keep more of their hard-earned money and therefore be more inspired to save and invest. The flat tax plan would treat everyone equally. If Joe Rich Guy makes one hundred times more than Joe Middle Class, then he will pay one hundred times more in taxes. On the same token, Joe Rich Guy would no longer be able to use the tax loopholes that plague the current system.
Critics of the flat tax often decry that the rich benefit the most from such a plan. The fact is, though, that a person with a larger income is logically going to benefit more from a tax rate cut than a person with a low income. The wealthiest five percent of Americans pay more than half the taxes, so it is illogical to say they shouldn't benefit the most from a marginal tax rate cut.
Opponents of the flat tax also say that the flat tax will increase the deficit. While it is true that a 17 percent flat tax would generate less government revenue than the current system, these detractors ignore the long-term picture. A flat tax would spark economic growth and job creation that would lead to increased tax revenues, a fact that critics and even some government economists ignore. After the Reagan tax cuts in 1983, personal income tax revenues jumped more than 28 percent (after adjusting for inflation) in the subsequent six years.
The flat tax was greeted with much fanfare when former House Majority Leader Dick Armey (R-Texas) and Sen. Richard Shelby (R-Ala.) introduced a flat tax bill in 1995. While the issue has somewhat faded due to geopolitical events of the past few years, the current tax system remains unpopular and ripe for a radical overhaul. Republicans aren't the only ones calling for an overhaul. House Minority Leader Richard Gephardt (D-Mo.), stated that "Our tax code has become a dense fog of incentives, inducements, and penalties that distort the most basic economic decisions, constrain the free market, and make it hard for Americans to run their own lives."
There is no such thing as a perfect tax system, but the flat tax takes us much closer than the current system does. A flat tax will never become a reality, though, if the voters don't demand it. But the voters should demand it, because there's one simple reason that the public and not the government should be the one's dictating tax policy: It's your money, not theirs.
(Joe Schilling's column appears Tuesdays in The Cavalier Daily. He can be reached at jschilling@cavalierdaily.com.)
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