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The flat tax: restoring freedom and fairness to federal taxation.


As Congress contemplates another round of tax cuts in 1998, Senators and Representatives will be eyeing the political implications of full-blown Tax Reform. The issue emerged with the report of the National Commission on Economic Growth and Tax Reform, chaired by ex-Congressman and long-time flat tax advocate Jack Kemp. The 1996 Kemp Commission report, Unleashing America's Potential, proposed scrapping the Internal Revenue Code and replacing it with a single, low-rate tax system with a "generous" personal exemption and full payroll tax deductibility. The proposal preserved the home mortgage interest and charitable contribution deductions and had no separate taxation of capital gains.

About the same time the Kemp Commission report was released, Steve Forbes introduced his Forbes Plan. The plan applied a flat 17% rate of tax to earned income and allowed large individual and dependency exemptions and tax-free treatment of social security benefits, pensions, interest and dividends. Other variations on the flat tax were introduced during 1996, including Gephardt's 10% Tax, the Gramm plan, the Mack plan and the Domenici/Nunn plan.

Tax Reform popped back into the spotlight with the report of the National Commission on Restructuring the Internal Revenue Service. The report, A Vision for a New IRS, recommended widespread changes in the agency in major areas such as Congressional oversight, management, workforce and culture, customer service, modernization, electronic filing and taxpayer rights. The Commission also called upon Congress to "take steps to ease the burden of tax administration on the IRS and reduce taxpayer frustration," in effect asking for reform of the tax system.

Soon after the Restructuring Commission released its recommendations, the Taxpayer Relief Act of 1997 was passed. It is one of the most complex tax bills in recent memory, containing over 800 Internal Revenue Code amendments and 300 new provisions which phase-in over a period of years. The legislation was followed by Senate Finance Committee hearings into abusive treatment of taxpayers by the IRS, which created renewed calls for reform of the tax agency.

With such focus on tax reform over the past two years, the issue is predicted to be center-stage in the 1998 election campaigns. NSA is pleased to present a series of articles on the various proposals regarding tax reform. The first in our series is on The Freedom and Fairness Restoration Act by House Majority Leader Dick Armey. We hope you will carefully consider the articles on tax reform and enter into the national debate.

After Americans are through celebrating the Holiday Season, that other season begins: Tax Season. Unlike the holidays, Tax Season isn't cause for much celebration. America's households - and accountants - become buried in the eight billion pages of forms and instructions the IRS sends out each year. This year Americans will spend more man-hours complying with the tax code than will be devoted to producing every car, truck, and van built in the United States.

I believe that most accountants are just as frustrated as other Americans with the tax code's sheer complexity. In fact, no one knows more about the deficiencies of today's tax system than the nation's accountants and tax professionals. Unfortunately, while most people are fed up with the tax code, there are plenty of beneficiaries of the tax system in Washington, D.C.

It is the tax code's complexity - its incomprehensible maze of tax laws - that allows politicians to micromanage the U.S. economy and award loopholes to special interest groups. There are more than 67,000 people working in the lobbying industry in Washington, making it the largest private sector employer in the city. In fact, if the lobbying sector in the nation's capital were its own economy, it would be larger than the entire economies of 57 different countries. The number one issue on which they lobby is, you guessed it, the tax code.

I believe the current system is broken beyond repair. That's why I introduced the Freedom and Fairness Restoration Act, legislation that would scrap the current tax code and replace it with a flat 17 percent on all income. Under a flat income tax system, every dollar of income in the economy would be taxed through either the individual wage tax or the business income tax.

Here's how it works. Individuals would calculate their wage and pension income, subtract a generous personal allowance ($33,300 for a family of four), and pay a flat 17 percent tax on the rest. That's it. You could file your return on a form the size of a postcard.

Business income would also be taxed at the same 17 percent rate. Businesses, from the family farmer to a Fortune 500 company, would subtract expenses from revenue and pay 17 percent on the remainder. Taken together, the business and wage taxes ensure that the fiat tax system taxes every dollar of income earned in the economy.

Like any tax system, there will always be some compliance costs and some gray areas of the code. And of course there will always be a tax collection agency. However, most of the complexity that currently beleaguers the American people is eliminated under the flat tax. Depreciation is replaced with immediate expensing. The alternative minimum tax, which in a few years will hit millions of taxpayers, is repealed. Complex pension rules are no longer necessary. The tax on foreign earnings and the foreign tax credit, which raise little revenue but are incredibly complex, are gone too.

Since I introduced my legislation in 1994, I have received thousands of letters supporting the flat tax for three reasons: it's simple; it's fair; and it's pro-growth. (Many of these letters, I should point out, have come from IRS agents and tax professionals).

The fiat tax is simple. The fiat tax would slash compliance costs, freeing accountants, small businessmen, and ordinary taxpayers from government red tape. It would replace 480 tax forms with two forms; one for individual wages and one for business income. According to the Tax Foundation, the fiat tax would reduce compliance costs by 94 percent.

The flat tax is fair. Under a flat tax, no matter how much you earn, what kind of business you're in, or how many lobbyists you have roaming the halls of Congress, you would be taxed at the same rate as every other American. No tax breaks or special loopholes. No schedules. No special deductions or credits. No social engineering or economic tinkering. Everyone would pay the same flat 17 percent rate.

The flat tax is pro-growth. Because the flat tax would reduce unnecessary compliance costs, promote greater economic efficiency, reward saving, and cut tax rates on work and investment, it would lead to an economic boom and higher wages. According to the chairman of the economics department at Harvard University, Dale Jorgenson, the economy would be 10 percent larger under a flat tax than it would be if we preserved the current system. In other words, the typical family would see its yearly income rise by $5,000 within five years.

The flat tax is more than a plan that's so simple Americans could file their taxes on a postcard. It's a vision of what America can be again - a formula for rejuvenating our economy, freeing our entrepreneurial talents, and raising family wages. It's a common-sense plan for returning to a government that is simple, honest, and fair.

(Rep. Dick Armey (R-TX) is the majority leader of the U.S. House of Representatives and represents Texas' 26th Congressional District. Comments on his article may be sent to: The Honorable Richard K. Armey, United States House of Representatives, 301 Cannon House Office Building, Washington, D.C. 20515.
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Author:Armey, Richard K.
Publication:The National Public Accountant
Date:Jan 1, 1998
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