April 15, 2005, 7:53 a.m.
Taxing Choices
Let Americans choose to opt out of the tax code.

As April 15 arrives, millions of Americans greet this black-letter date as cheerfully as school kids lining up for vaccine injections. Once again, this will hurt.

President Bush’s bipartisan tax-reform commission should endorse a powerfully simple idea that would ease the pain of many taxpayers: Let Americans choose between today’s tax system and a 19-percent flat tax.

For now, Americans contend with a federal tax code that has grown luxuriant after ten years of Republican congressional dominance. As Cato Institute tax analyst Chris Edwards reports, federal tax rules that filled 40,500 pages in 1995 stretch to 60,044 pages today. A decade ago, 50 percent of Americans hired tax professionals; at least 62 percent do so now.

Last year, Americans spent 6.5 billion hours wading through the 529 different tax forms the IRS scrutinizes. Completing the standard 1040 tax return and Schedules A, B, and D required 21.2 hours on average in 1995, compared with 28.5 hours in 2004; painting Uncle Sam a numerical portrait of one’s finances typically requires more than 3.5 work shifts. Add this temporal insult to the economic injury of sending the Treasury money atop this mind-numbing paperwork.

Tax compliance will cost U.S. individuals, businesses, and non-profits at least $223.7 billion this year, the Tax Foundation estimates. Every dime of this fortune could be employed more productively in the stock market or any home-loan agency. Economists call this “deadweight loss.” Regular folks call this “cash down the toilet.”

Still, for some people, this fetid whirlpool has value. The home-mortgage deduction, business entertainment expenses, and other write-offs make today’s structure grimly appealing to some filers. If they like the tax code, let them have it.

Steve Moore agrees. The president of the Washington-based Free Enterprise Fund (and NRO-er) wants Americans to decide how to pay taxes. His Freedom to Choose Flat Tax plan would allow Americans who prefer today’s tax code to file under it. Those who don’t could submit postcard-sized returns and pay a 19-percent flat income tax with no deductions beyond personal and dependents’ exemptions.

For individuals and companies, once you go flat, you don’t go back. All exits from today’s system are final.

Businesses would pay 19 percent with no deductions beyond immediate amortization of capital purchases. Stupefying depreciation tables would be relegated to Karl Marx’s Museum of Antiquities.

If you fear outsourcing employment, insource capital. A 19-percent corporate tax would help U.S. companies attract job-making foreign investment as Germany, Poland, Slovakia, and other European nations slash business levies below 20 percent. America’s 35-percent corporate tax — the industrialized world’s highest — currently exports domestic funds and repels international cash.

How does Moore “pay for” a plan that “lowers tax rates to 19 percent,” as he describes it? “This effective rate cut will cause a burst of growth in work, investment, and job creation. This dynamic pro-growth impact dramatically will increase tax receipts.”

Tax-cut skeptics might scoff at Moore’s faith in the supply-side tenet that tax relief finances itself by stimulating economic activity and yielding higher tax revenues and lower public-assistance outlays as the unemployed return to work. This is exactly the prediction of David Malpass, chief economist with Bear, Stearns & Co., Inc. (he's another NRO contributor).

The 2003 tax cut “was scored as a big loser for Washington, $100 billion per year for ten years,” says Malpass, a Reagan administration deputy assistant Treasury secretary. “But it turned out to be a big winner for the nation, helping generate $2 trillion in stock-market gains almost immediately, plus steady 4 percent economic growth and 2.2 million new jobs in 2004. It also contributed to the $180 billion-per-year surge in tax receipts. That’s a phenomenal return on investment. The Freedom to Choose Flat Tax would score the same way — big budget losses assumed inside the Beltway, but really big gains for the nation if it actually were enacted.”

“I think this is a great idea,” says Steve Forbes, CEO of Forbes, Inc. The New York publisher popularized the flat tax in his 1996 and 2000 Republican presidential campaigns. “People always focus on what you’re going to lose. You know what you’ll lose, but the gains don’t really register. When I ran, people were much more open to the idea that they could see for themselves which system would be better. That way, they would not see politicians pull a fast one, take away their deductions, and sock them with higher taxes. That line always got a big hand.” (Full disclosure: I was a Forbes 2000 communications consultant.)

Meanwhile, Bush’s tax-reform commission is reportedly evaluating a consumption tax. Georgia Rep. John Linder’s proposal would padlock the IRS. After early applause, the details in Linder’s bill should muffle that ovation.

Linder would launch a 23-percent national sales tax. Coupled with state and local sales taxes, New Yorkers, for example, would take a 31.75 percent tax hit on every retail purchase. Such exorbitant rates would lead millions down a dark alley into the black market. Revenue shortfalls would prompt calls for an even higher sales tax. This could devolve into an opaque, paperwork-intensive, European-style value-added tax (VAT). As Americans for Tax Reform president Grover Norquist warns: “‘VAT’ is a French word for big government.”

Today’s tax code need not be buried so much as transcended. Americans already choose between Fannie Mae and Ditech.com, PBS and A&E, and the post office and FedEx. Why not pick either the tax code or the optional flat tax? Let the sentinels of the status quo argue against granting Americans this basic freedom.

George W. Bush wants to offer younger Americans the opportunity to remain in the Depression-era Social Security system or voluntarily open 21st-century personal retirement accounts. He also should make Steve Moore’s tax-reform proposal his own. President Bush is welcome to this slogan: “It’s your tax return. It’s your choice.”

— Deroy Murdock is a New York–based columnist with the Scripps Howard News Service and a senior fellow with the Atlas Economic Research Foundation in Arlington, Virginia.

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