FREE ESSAY ON THE AMERICAN TAX SYSTEM AND THE FLAT TAX SOLUTION

THE AMERICAN TAX SYSTEM AND THE FLAT TAX SOLUTION

The Tax System
The current income tax system is in terrible shape. It is complex; unfair; inhibits
saving, investment and job creation; imposes a heavy burden on families; and undermines
the integrity of the democratic process. The system cannot be repaired by simple
tinkering and fine-tuning, it must be completely repealed and replaced. The U.S. income
tax code is a monument to unnecessary waste. The income tax system is so complex, the
Internal Revenue Service (IRS) publishes number 480 tax Forms and 280 Forms to explain
the 480 Forms. The IRS sends out eight billion pages of forms and instructions each year
which, if laid end to end, would circle the earth 28 times. Nearly 300,000 trees are cut
down each year to produce the paper on which IRS forms and instructions are printed. But
the administrative costs of the tax system far exceed those borne directly by the IRS.
Each year Americans devote 5.4 billion hours complying with the tax code, which is more
time than it takes to build every car, truck and van produced in the United States. The
cost of complying with the tax system totals about $200 billion annually or when broken
down: $700 for every man, woman and child in America. The main reason the tax code is so
complex is the proliferation of deductions, credits and other special preferences in the
tax law. Because of these loopholes, taxpayers with similar incomes can pay vastly
different amounts in taxes. This uneven treatment of taxpayers is fundamentally unfair
and is at odds with the American value of equality under the law. The American people are
beleaguered by the highest tax burden in American history. Taxes represent a larger share
of the U.S. economy than ever before. In fact, the typical American family now pays more
in taxes than it spends on food, clothing, transportation and shelter combined. The tax
burden on families with children has risen dramatically during the last few decades. High
taxes have fueled unparalleled growth in government. The U.S. public sector is now larger
than the entire economy of any country in the world except Japan and the United States
itself. The tax code reduces incomes through punitive taxes on saving, work and
entrepreneurship. It places multiple layers of tax on saving, thus reducing investments
in new machines and technology that make American workers more efficient and competitive.
High marginal tax rates (the tax rate on the last dollar earned) discourage work, saving
and entrepreneurial activity, which leads to a smaller economy. By favoring certain
economic activities over others, the tax code distorts financial decisions and reduces
economic efficiency. According to a study by an economist with the Congressional Research
Service, the corporate income tax costs the economy more in lost production than it
raises in revenue for the Treasury. Dale Jorgenson, the chairman of the Economics
Department at Harvard University, found that each extra dollar the government raises
through the current system costs the economy $1.39. The tax code does more than
complicate people's lives during tax season and reduce living standards. It pollutes
Washington's political culture. As special-interest provisions have been added to the tax
code, Washington's lobbying industry has flourished. Washington's lobbying industry,
which is the largest private employer in the nation's capital, generates $8.4 billion in
revenue each year. If the lobbying industry were its own economy, it would be larger than
the economies of 57 countries. While the thousands of lobbyists in Washington have
prospered in an environment of tax favoritism, the typical taxpayer has not. 
The flat rate income tax bill, numbered H.R. 1040, proposed by Dick Armey (Rep., TX) and
Co-sponsored by Bob Barr (Rep., GA) does away with the entire income tax code and
replaces it with a flat-rate income tax that treats all Americans the same. This plan
would simplify the tax code, promote economic opportunity, and restore fairness and
integrity to the tax system. The flat rate would be phased-in over a three-year period,
with a 19 percent rate for the first two years and a 17 percent rate for subsequent
years. Individuals and businesses would pay the same rate. The plan eliminates all
deductions and credits. The only income not subject to tax would be a generous personal
exemption that every American would receive. For a family of four, the first $35,400 in
income would be exempt from tax. There are no breaks for special interests or loopholes,
just a simple tax system that treats every American the same. The flat tax replaces the
current income tax code, with its maze of exemptions, loopholes, and targeted breaks,
with a system so simple Americans could file their taxes on a postcard-size form. The Tax
Foundation estimates that a flat tax would reduce compliance costs by 94 percent, saving
taxpayers more than $100 billion in compliance costs each year. The flat tax will restore
fairness to the tax law by treating everyone the same. No matter how much money made, or
what kind of business, people will be taxed at the same rate as every other taxpayer.
Because the flat tax treats all economic activity equally, it will promote greater
economic efficiency and increased prosperity. When saving is no longer taxed twice,
people will save and invest more, leading to higher productivity and greater take-home
pay. When marginal tax rates are lower, people will work more, start more businesses and
devote fewer resources to tax avoidance and evasion. And because tax rules will be
uniform, people will base their financial decisions on common-sense economics, not arcane
tax law. According to one study by a former chief economist for Congress' Joint Committee
on Taxation, under the flat tax the economy would be 5.7 percent larger after five years
than under the current system. That translates into $522 billion in higher output, or
$3,000 in higher income for the typical family of four. Michael Boskin, a former chairman
of the Council of Economic Advisors, estimates that the flat tax would increase the size
of the economy by ten percent. 
Because of the high tax overpayment, there is room to provide tax relief. And the flat
tax would provide significant tax relief. When the rate is reduced to 17 percent in the
third year of the proposal, there would be significant further tax reduction. The bill is
carefully designed to safeguard taxpayers against a return to budget deficits, however.
Rigid spending caps are included in the plan. Coupled with the additional economic growth
the flat tax will spur, the tight spending controls will ensure that the budget reaches
complete balance by 2002. Under the flat tax, the more you earn, the more you pay. In
fact, because of the high family exemption, the more a taxpayer earns, the greater the
share of his income he pays in tax. A family of four earning $25,000 would owe no tax
under the proposal. A family of four earning $50,000 would pay only six percent of its
income in income taxes while a family earning $200,000 would pay 14 percent. The flat tax
eliminates the marriage penalty and nearly doubles the deduction for dependent children.
By ending the multiple taxation of saving, the flat tax provides all Americans with the
tax equivalent of an unlimited IRA. This will make it easier for families to save for a
home, a vacation, a college education or retirement. 
The flat tax trusts average Americans by giving them the freedom to make their own
economic decisions. In addition, the flat tax includes a special safeguard against higher
taxes. It requires a three-fifths super majority vote of Congress to raise the tax rate,
lower the family allowance or add loopholes. By eliminating itemized deductions and
special breaks, the flat tax would have a chilling effect on special-interest lobbying
and transform the political culture in Washington. Under a simple, transparent system
that taxes all income one time--and requires a super majority vote to add a
loophole--there will be far fewer lobbyists than under today's special-interest,
free-for-all tax system. According to a study by an economist at the Federal Reserve Bank
of Kansas City, published in the Kansas City Federal Reserve's Economic Review, the flat
tax would reduce interest rates by 25 percent, or about two percentage points. Lower
interest rates under the flat tax will not only reduce the costs of student, car and
credit card loans, they will also offset the loss of the home mortgage interest
deduction. According to reports by the Congressional Research Service and the Tax
Foundation, the flat tax will have no meaningful effect on home values. Consider how a
sharp reduction in interest rates would affect the average family that earns $50,000 and
deducts $5,000 in mortgage interest. The home mortgage deduction saves this family $750
in taxes, where a 25 percent drop in interest rates saves it $1,250 in lower interest
payments. That family is $500 better off under the flat tax with lower interest
rates--even without the home mortgage interest deduction (and not counting the higher
personal exemptions). Also, as incomes rise under the flat tax, so too may donations to
America's charities. 
The flat rate income tax is the answer to most of the problems in our income tax system
today. It would greatly simplify the tax system, saving taxpayers and businesses immense
amounts of time each year. Most of all, it would make the system fairer by reducing
deductions, exemptions, and loopholes. If this bill is put into place, doing taxes would
be a lot easier and fairer to Americans everywhere.