The government's right to levy taxes is based on its obligation to provide for the common defense and promote the general welfare of the citizenry. People consent to being taxed only if they perceive equity in the government's tax policy.
The first attempt by the federal government to impose a tax on income was ruled unconstitutional in 1895 on grounds of inequity. The Supreme Court found the proposed tax to be in violation of Article 1, Section 8, of the Constitution , which requires that ''all duties, imports and excises shall be uniform throughout the United States.''
The issue of uniformity was rendered moot in 1913 when, pursuant to the 16th Amendment to the Constitution, Congress first received authority to levy taxes on the income of individuals. That amendment, enacted in direct response to the court's ruling, provides that ''the Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.'' With that language Congress first finessed the equity issue. Unfortunately, the first time was not to be the last.
The simple, progressive income tax enacted in 1913 had a single purpose - to raise revenue to pay for government services. Today that tax has been grossly distorted because it has been used by Congress for 68 years as a tool for economic and social engineering. Special tax exemptions, deductions, and credits permeate today's tax code. The result is an intentionally inequitable treatment that has engendered widespread contempt for the whole system.
Attempting to untangle the tax code appears to be a political nightmare. Every tax break has a constituency and a justification, and some loopholes are more defensible than others, but taken together they are bad policy. They distort the legitimacy of the government's right to tax and they erode public respect and confidence in government.
Massive simplification of the tax code is needed immediately. We must begin to reform our tax laws fundamentally in a way that will restore public respect for the system.
A study of 1978 revenues and taxes by Barrons, published last year, makes a strong case for flat-rate taxes. By definition, a flat-rate tax is where everyone pays the same share of tax on every dollar of income. There would be no progressive rules. There would be no exemptions, deductions, exclusions, or deferrals and no loopholes.
As things stand now, the use of tax legislation for policy purposes has resulted in more than the loss of public confidence and trust. The tax code is no longer even a good vehicle for raising revenue. As a result of congressional tinkering, more than 25 percent of all revenue subject to taxation will be legally exempted through loopholes. Almost 100 special provisions in the general tax code - known as tax expenditures - will exclude more than $200 billion from collection this year alone.
Special exemptions in the tax code push the general tax rate schedule higher. Those at the bottom of the income ladder are saddled with a proportionally high tax burden. They suffer the most financially from tax rate increases precisely because they benefit the least from special exemptions and deductions.
At the top of the income pyramid the situation is reversed. Those with large incomes not only can take maximum advantage of special exclusions - they must. Tax rates for upper-income brackets are confiscatory. The need to protect financial gain from confiscation has changed what used to be a mark of success into a social stigma.
In 1978 the Internal Revenue Service collected $188.6 billion in personal income taxes. The vast majority of those taxes were paid by middle-income wage earners, those making $15,000 to $50,000 a year. At the lower end of this group the average payment was 14.4 percent of taxable income. At the top the rate was 21.7 percent. If tax rates had been constant and without loopholes, Barrons calculates that the same amount of revenue could have been collected by a flat rate of 11 percent.
For those of the supply-side persuasion, there is the satisfaction of knowing that under the flat rate the last dollar earned would be taxed at the same rate as the first. Progressive marginal tax rates would be a thing of the past, and general rates would further decline.
Most important, a flat-rate tax would allow the government to raise revenue in a manner consistent with the crying need to reestablish public trust.
Tax revolts do not just happen; they are caused - for the same reasons today as in the past. People sense that public values and the common good are being subordinated to the self-centered tactics of politicians to subsidize the deserving, placate the threatening, and manipulate the economy. As a result, the very fabric of the social contract is in danger.
As a first step toward reform, I have introduced legislation amending the budget act, designed to reverse the recent trend toward excessive growth in the number of tax deductions enacted by Congress. My bill, the ''Tax Expenditure Limitation and Control Act of 1981,'' would place a statutory limit on the amount of revenue loss from deductions at a figure not to exceed 30 percent of net revenues collected. This 30 percent provision would subject existing deductions to increased oversight and eliminate about $8 billion in lost revenue from loopholes the first year.
Additionally, this legislative initiative would go a long way in discouraging the proliferation of new deductions. New tax breaks recently have grown by 14 percent a year as measured by their revenue loss impact. Under my proposal, any new deductions would have to be authorized by the congressional committees overseeing the activity receiving the proposed tax break and by the budget committees of both houses of Congress before they could be brought before the whole Congress for consideration.
Because tax loopholes, once enacted, tend to outlive Methuselah regardless of their effect on the public good, the ease with which they become law must be reduced.
These provisions are designed to bring a greater measure of control and accountability to the congressional process. We must recognize tax loopholes for what they are and subject them to the same congressional scrutiny as other spending programs.