How to Reform The Federal Tax System: Just the Basics, Please

After more than a year of public debate, it is fair to say that there is no universal agreement on the details of how to reform the federal tax system. Do we replace the entire income-tax system with a new national sales tax? Or do we streamline the income tax by shifting to a flat tax? Do we adopt a savers-friendly reform of the income tax (known as the USA Tax)?

It will take more discussion, analysis, and congressional deliberation before a specific tax reform emerges that has broad enough support to be enacted. Yet some progress has been made in developing a consensus on the direction of change.

There is a widespread belief that the current tax system is unfair and too complicated. It also is viewed as hurting the individual family and individual business, especially the smaller enterprise. And, when we step back from the mass of specific provisions and exceptions, we see that the present Internal Revenue Code depresses the American economy. That means it reduces jobs and living standards at home and erodes our competitiveness in the global marketplace. These issues transcend traditional political partisanship, which may make it unlikely that real progress can occur in the midst of a presidential election campaign.

Given the variety of personal interests, it is especially difficult to develop any new approach to fundamental tax policy that can garner majority support. The following is an attempt to concentrate on basic themes rather than on specific approaches. These six characteristics of the desired revenue system are based on extended discussions with groups ranging from technical experts to ordinary taxpayers.

The new tax system should:

1. Be fair to the average taxpayer - and should be seen that way. People in the same economic circumstances should be taxed the same, regardless of where they live or whom they know.

2. Be understandable to the average citizen. Eliminating special privileges will help simplify the tax system and achieve greater fairness. Most of the complications in Form 1040 result from the requirements of statutes passed by Congress, rather than from the shortcomings of the form designers in the Internal Revenue Service.

3. Have lower tax rates than today's. How flat the tax structure can get will depend on the success in eliminating those costly loopholes and in energizing the economy. That also means it would be helpful to defer the array of tax cuts being suggested by various candidates until next year, when they can be included in a more carefully drafted, comprehensive tax-reform bill.

4. Help the average family achieve financial independence. That means it should do more to encourage saving and investment. We will also have a stronger economy if more of our fellow citizens have a direct financial stake in the operation of the private-enterprise system.

5. Make it easier to start a new business and for that business to grow and compete. This is the key to job creation, and it requires a tax system that looks at business enterprise not as a burden to society but as a positive benefit. As former President Reagan was fond of reminding us, business collects taxes - people pay taxes.

6. Foster a stronger economy on a sustainable basis. It will take a more rapid rate of economic growth to produce a higher living standard today and a brighter outlook for the future.

A final thought: Just as there may be more than one path to salvation, there is more than one approach to tax reform that can achieve these six objectives. It will take the ability of competing interest groups to work together and to adopt a middle-of-the-road position.

*Murray Weidenbaum is chairman of the Center for the Study of American Business and Mallinckrodt distinguished university professor at Washington University in St. Louis.

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