Capitol Comment 195 - The Flat Tax: Restoring Honesty to the Tax Code
July 16, 1998 By Michael Keegan
America’s tax system is broken and in need of fundamental reform. Gone are the days when the tax system was designed simply to raise the necessary revenues to fund essential government programs. Today, policymakers routinely use the tax system as a vehicle to pick winners and losers and hand out special favors to the politically well-connected. This is just one more reason why the current system should be scrapped altogether and replaced with a flat tax.
With a single rate of 17 percent, and tax forms the size of a postcard, the Armey-Shelby flat tax would eliminate all of the deductions and special breaks that policymakers use to manipulate the tax code for their own political purposes. Thus, the flat tax would restore honesty and decency to the tax code by putting an end to this kind of political self-interest, and treating everyone equally under the law.
Judging by the mind-boggling length and complexity of the tax code, those who have contributed money to members of the tax-writing committees have succeeded in carving out special provisions for their own narrow interests.
The current tax code, with five marginal tax rates and numerous loopholes, deductions and shelters, has become one of the country’s largest growth industries; indirectly employing tens of thousands of accountants, tax lawyers and lobbyists. In fact, for the first six months of 1997, there were 9,198 different lobbyists registered in Washington, D.C.1 Needless to say, many of these lobbyists were attempting to gain special favors or exemptions to the tax code on behalf of their clients.
Since the tax code provides arguably the greatest source of lobbying activity in Washington, it should come as no surprise that members of the congressional tax-writing committees are the most heavily-lobbied. According to data from the Federal Election Commission (FEC), during the 1995-1996 congressional cycle, the 39 members of the House Ways and Means Committee received a total of $14,119,462 in contributions from various political action committees (PACs). During this same time period, the 20 members of the Senate Finance Committee received a total of $26,427,156 in PAC contributions.2
While people contribute money to elected officials for various reasons, it is safe to infer that the expected return on this kind of political investment is favorable treatment within the tax code. Judging by the mind-boggling length and complexity of the tax code, those who have contributed money to members of the tax-writing committees have succeeded in carving out special provisions for their own narrow interests. Economists define this attempt to manipulate the political process for private gain as "rent-seeking."
Rent-seeking not only distorts the political process by rewarding the politically well-connected at the expense of others, it has serious economic consequences as well. With its numerous loopholes and shelters, the current tax system narrows the tax base by essentially shielding money that would otherwise be subject to taxation. Therefore, by ridding the tax code of its loopholes and shelters, the flat tax would broaden the tax base. By broadening the tax base, a lower tax rate would collect the same amount of money as higher rates. In other words, if each person pays the same rate once, everyone can enjoy lower rates.
Furthermore, no longer would any business, large or small, have to hire a team of tax lawyers, lobbyists and accountants just to procure a tax break or negotiate the tax code. So, instead of investing millions of dollars in unproductive economic activities designed only to receive preferential treatment from the tax code, businesses could invest this money in more productive activities such as building new plants and hiring new workers.
History shows that even when Congress attempts to improve the tax code, they succeed mostly in making it worse. Consider the Taxpayer Relief Act of 1997. While it was advertised as a tax cut for all Americans, it succeeded primarily in making the tax system far more complex. In all, the Taxpayer Relief Act made 824 changes to the tax code and added 271 new regulations. This complexity is reflected in a Money magazine survey that asked 46 tax experts to estimate a hypothetical family’s 1997 tax liability. Not surprisingly, they received 46 different answers.3
The Armey-Shelby flat tax would change all of this. With a single rate of 17 percent, and no deductions, the flat tax would eliminate the array of special preferences sprinkled throughout the tax code. Taxpayers would receive just one postcard-sized tax form from the IRS, where they would add up their wage, salary, and pension income; subtract their personal allowances; and pay a flat rate of 17 percent on the balance. No matter how much someone makes, or whether or not they have a clever accountant, everyone will be able to understand the tax laws with which they are forced to comply, and everyone will be treated equally under the law.
The Armey-Shelby flat tax bill, H.R. 1040, also contains one very important measure that will check the ability of future Congresses to restore their cherished deductions and loopholes — a mandatory three-fifths supermajority vote in both houses of Congress to raise the tax rate, lower the family allowance or add new loopholes to the system.
The time has come to restore honesty and decency to the tax code. The time has come scrap the current tax code and replace it with the flat tax. The flat tax will restore the tax code to its proper role as a tool to generate revenue as efficiently as possible to fund necessary government spending, and not as a tool to be used by politicians for their own political purposes.
1Center for Responsive Politics, "Who’s in the Lobby?" May 5, 1998.
2Author’s calculations based on FEC data of the 1995-1996 election cycle.
3Joan Caplin, “6 Mistakes Even the Tax Pros Make,” Money, March 1998.
