February 7, 1996
Most Americans view our current tax code as complicated, abusive, and unfair, but politicians love it, hence the attack on presidential candidate Steve Forbes for his advocacy of the flat tax proposed by Representative Dick Armey and Senator Richard Shelby. The proposal calls for a tax rate of 17 percent on all income. It contains a $13,000 individual deduction, $17,200 for a single head of household, $26,200 for a married couple, and a $5,300 deduction per child. A family of four wouldn't pay taxes on income under $36,800. To achieve this low rate, most deductions would be eliminated, including mortgage and charitable deductions.
The flat tax would instantly increase our gross national product. Americans spend six billion hours annually simply complying with the tax code: record keeping, tax planning, preparing tax returns, audits, and court appearances. Those hours, spent productively, would produce the annual outputs of our auto, truck, and aircraft industries.
Presidential candidate Lamar Alexander, probably assisted by the real estate and building lobby, is one of Forbes’ attackers. He's telling people that, if there's a flat tax, the value of their homes and farms will decrease. That's a fear-mongering lie. Yes, loss of interest deduction has the effect of reducing housing and land values, but a flat tax will more than compensate. First, the flat tax is estimated to reduce interest rates by 25 percent. A $50,000-a-year family currently averages a $3,834 mortgage deduction yielding a tax saving of $575. But a 25 percent drop in interest rates would yield a yearly saving of $959 for a net gain of $384. Second, since lenders wouldn't have to pay taxes on interest income, they'd charge lower rates. Finally, there'd be benefits from lower tax compliance costs and higher economic growth.
The flat tax has a two-to-one support in opinion polls so the big question is, Why are politicians and some lobby groups against it? The answer is easy and it's the same old story: Politicians love power. Congress's most powerful committee is the Ways and Means Committee, whose former boss was Dan Rostenkowski and which is now headed by Bill Archer. It's also the committee whose members have the fattest political war chests. Getting on the Ways and Means Committee is a major goal for many members of Congress because it's in charge of tax favors. Among its largest clients are the real estate and building industries. Washington's big-time lobbyists attend every public meeting to protect and advocate their special interests. With a flat tax, members of Congress wouldn't have anything to sell in exchange for votes and campaign contributions (read: extortion).
As Bill Simon, former Treasury secretary, asks, “Now that Republicans control the levers of power, will they suddenly decide that big government is not so bad after all and decide to preserve the status quo?” I'm sorry to say that with the exception of those freshmen congressmen who've earned the zealot label for having voiced respect for the Constitution, there's probably an affirmative answer to Simon's question.
To be fair, the new Ways and Means Committee chairman Bill Archer wants to scrap the income tax altogether and replace it with a national sales tax. Getting rid of the income tax would be a national blessing but collection of a 30 percent sales tax, needed to raise today's revenues, would require an agency more abusive than the Internal Revenue Service. An idea better than either the flat tax or national sales tax would be to get federal spending back to its historic levels of 3 percent to 4 percent of our gross national product. That way, we could live with any tax collection system.