Scrap Tax Code? It's Not So Easy
Politicians' proposals for tax "reform" prompt a goodly number of skeptical remarks by tax experts.Skip to next paragraph
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Taxpayers, they say, shouldn't count on being able to send in their tax returns on a postcard for many years to come, if ever.
"These are all political signals being sent out that they want lower taxes and simpler taxes," says Martin Sullivan, an economist with Tax Analysts, a tax publisher in Arlington, Va. "There is no chance ... of anything happening soon."
Late last month, for example, Senate Republicans introduced The Tax Code Termination Act. It would, essentially, put an end to the Internal Revenue Code by Dec. 31, 2001. Introduced by Sens. Tim Hutchinson of Arkansas and Sam Brownback of Kansas, it has 25 cosponsors.
The House faces a similar bill.
President Clinton last week called it an "irresponsible scheme to eliminate our tax laws without any system to replace them."
"A crazy idea," echoes Joel Slemrod, a tax expert at the University of Michigan Business School in Ann Arbor. "It is not going to happen. It is a totally political debate."
"I'm surprised Clinton dignified those proposals with a response," says Mr. Sullivan. But he also, by the way, charges the president with "being AWOL on tax reform."
There is ample agreement that the American tax system is too complicated.
"There is no question the tax system could be simpler," Mr. Slemrod says. The code fills two volumes, each about 2.5 inches thick. Six volumes of tax regulations and thousands of tax cases and rulings add to the mess.
Reasons for complexity
But there are reasons - good and bad - for the complexity:
* A desire by Congress to make the system fair to more taxpayers.
* A need to prevent smart tax lawyers from finding loopholes that enable big money to escape taxation.
* A quest to subsidize desired programs without hiking taxes.
* Moves by legislators to give special tax favors to special interests.
Membership on the tax-writing committees of Congress is prized partly because it helps in campaign fund-raising.
The lobbyist who contributes $10,000 to a representative's campaign may find it easier to get a hearing on tax legislation than one who doesn't, notes Alan Feld, a professor at Boston University Law School.
"Fairness is a very squishy standard," he notes. "One man's fairness is another man's loophole."
A member of Congress probably won't regard a campaign gift as a bribe. But he may be persuaded more easily on the merits of the giver's tax ideas.
A number of Republicans have been seeking to harness the desire for tax simplification with various tax plans.
House majority leader Dick Armey of Texas, for example, advocates a flat income tax, as does GOP presidential candidate Steve Forbes. Rep. W.J. "Billy" Tauzin (R) of Louisiana calls for a national sales tax.
The latter probably won't fly in Congress. It is inefficient and inequitable, argues Slemrod, and would damage low-income people.
Representative Armey's plan would also cut taxes of the well-to-do at the expense of the middle class. So a flat tax would likely pass only with a Republican president.
Flat yes. But simple?
Moreover, experts say a flat tax would not be as simple as promised. And it would grow in complexity over the years for the same reasons the income-tax system has since its introduction in 1913.
Hundreds of pages of the tax code and hundreds of pages of tax regulations would have to be carried over to a flat tax, says Sullivan.
"Nobody, nobody can throw out the Internal Revenue Code and just start over again," he says.
An article by Professor Feld spells out dozens of important tax areas that would need complexity either to prevent erosion of tax revenues or to avoid new elements of unfairness.
Complex tax provisions for home offices, business expenses, or health insurance premiums serve a purpose.
"If you think you are going to get simplicity, think again," Feld says. "Life isn't so simple."