Politics & Policy

A Step Toward Tax Reform

Congress should not squander this opportunity.

We have recently learned that the IRS has begun singling out taxpayers at random for “special audits.” The sole purpose of these random, unwarranted government intrusions into the lives of individual Americans is to give the IRS a better statistical model about overall taxpayer compliance. Many of these randomly selected individuals will have to hire lawyers and accountants to help comply with the paperwork demands generated by these audits. If the IRS truly wants to improve compliance, their efforts would be better spent on reforming the archaic, complicated 45,000-page tax code to make it easier to comply.

A simple tax code is not only easier to comply with, but it produces more economic growth and new revenues that naturally flow from that growth.

The economic growth package that has been proposed by President Bush is a good first step towards fundamental tax reform. His proposal accelerates marginal tax rate reductions and eliminates the double taxation of investor capital. These proposals will increase the incentive for individuals to risk their personal capital, and it will simplify and clarify how the government taxes individuals. Transparency and simplicity are cornerstones of good tax reform.

Now that the president’s tax plan is in the hands of Congress, they should not squander this opportunity to make the tax code simpler. As the legislation works its way through the process, members of Congress should focus on saving and expanding the tax-reform elements of this proposal. To date, too many Republicans and Democrats have only looked at the static “cost” of the tax cut, and have ignored the real economic benefits of creating a fairer, flatter, simpler, and more honest code.

One of the most important principles of fundamental tax reform is that Americans should not be taxed twice on the same income. Double taxation is simply unfair and it’s wrong.

That’s why the president’s plan eliminates the tax on investor dividends. Double taxing savings and investment goes beyond unfair; as economic and public policy, it is just plain foolishness. When a corporation earns a profit, it pays a tax as high as 35% on those earnings (and that rate can be as high as 40% with state taxes included). With the profits left over after taxes, many corporations in turn provide dividends to their individual shareholders. The shareholders are then taxed on those dividends.

As a result, income earned by corporations is taxed twice, first at the corporate and then at the shareholder level. The combined tax is up to 60% on the income from an equity investment, which is bordering on confiscation.

Remember, this is a tax on corporate profits — these shareholders are risking their money to invest in businesses that are growing the economy and creating jobs. If an investor should be so wise, or lucky, to invest in a company that creates profits, Uncle Sam steps in and takes up to 60% of the winnings away. That is wrong — particularly when you realize that almost half of the benefits of repealing the dividend tax will go to senior citizens.

How many wealthy senior citizens do you know? This isn’t “tax cuts for the wealthy” as the worn out rhetoric goes. This is allowing hardworking, decent Americans to keep more of their hard-earned money. Americans who, in many cases, derive a significant portion of their living income from dividends.

There is another very important reason for Congress to take this step toward tax reform: The American people want it. Citizens for a Sound Economy (CSE) has conducted two extensive national polls on the president’s tax plan. These polls demonstrate that the most widely supported element of his proposal is the step towards fundamental tax reform. When informed that the president’s plan takes a significant step towards fundamental tax reform, 76% of the American people are more likely to support the plan. I’m not one to suggest that we govern by polls, but those are numbers that should catch the attention of the Congress.

The American people want tax reform. The IRS wants more audits. I know that my former colleagues are smart enough to realize that if you give the American people what they want, the IRS’s audits will become unnecessary.

— Dick Armey is the former House Majority Leader.

Members of the National Review editorial and operational teams are included under the umbrella “NR Staff.”

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