- The Washington Times - Tuesday, February 26, 2002

Treasury Secretary Paul O'Neill, speaking at the U.S. Chamber of Commerce, recently explained that he intends to simplify the Internal Revenue Code.

He has a momentous task ahead of him since the present code is 13,00 pages long, and is less than clear, even to experts. It has created a business of $150 billion a year in accounting and law paid by taxpayers in addition to their taxes to interpret. It has 1.4 million words, 650 different forms and is the cause of millions of headaches, nervous breakdowns, even suicides.

"Our tax code is an abomination," says Mr. O'Neill. "Everyone who has anything to do with it agrees it is just an unbelievable mess."

Amen. It needs to be cut and tarred. But perhaps most importantly, it needs to be reformed. In fact, it is in serious, even dire, need of reform. As presently constituted, it is not fair to anyone, rich or poor.

Of course, there is one strong caveat. Primum non nocere. First do no harm. We must be careful not use the "reform" to raise our taxes even more, as has happened in the past when our politicians broke their promises. In 1986, "reforms" eliminated our deductions for sales taxes and interest, changes that now cost each of us up to several thousand dollars a year in higher IRS charges.

In 1983, changes in the Social Security tax law increased those taxes by 25 percent, creating the present Social Security surplus that the government expropriates each year and spends in the general fund. The government then grants Social Security a bond, a debt carried as an "asset," a fiscal trick not too dissimilar to that ostensibly employed by Enron to hide debts and losses. It is that government trick that created the fleeting fake "surplus" of last year. and the ludicrous projections of trillions more to come.

In 1986, in exchange for the higher taxes on Social Security, the government lowered the maximum income taxes to 28 percent. But that has since risen back to more than 40 percent, and the higher Social Security taxes are still with us.

The government cannot be trusted, as we have so painfully learned over the years. But neither is it necessary to do harm with each change.

Some of the changes desperately needed, to which Mr. O'Neill should pay special attention, and which would be of great benefit to middle-class taxpayers who pay the bill, include:

• Eliminate the Alternative Minimum Tax for most personal income. Designed to stop corporations from legally cheating, which is often their wont, it now bedevils honest individual taxpayers. While only a handful of rich taxpayers were once subjected to it, it has now invaded the upper middle classes, whose number grows dramatically each year. The problem? It was never indexed for inflation, dragging unsuspecting taxpayers into its net. It needs to be indexed retroactively to the date of its inception.

• Stop the near-double Social Security tax on the self-employed. A carpenter making $50,000 a year is usually in the 28 percent federal bracket, plus 13.3 percent for Social Security after a federal deduction. When you add sales taxes and state income taxes, he is working mainly for government. He has the choice of cheating or starving. Reduce the Social Security tax on self-employed who make less than $100,000 a year to the same as other employees.

• The present tax cuts do not truly go into effect until 2004, 2006 and 2010. The trouble is that by 2011 all the cuts will be eliminated and the tax structure placed back to its present status. Congress must make these cuts permanent. As income tax cuts by John F. Kennedy and Ronald Reagan showed, lower rates mean prosperity and higher government revenues.

• To receive credit for interest payments, we must now take out a home equity loan. Other interest, especially on credit cards, is no longer deductible since the 1986 "reform." Not everyone has a home or the desire to increase their long-term debt. The answer is simple. Return to the pre-1986 system when all interest payments were deductible,. This would be a boon to all taxpayers, but especially to low-income families who are addicted to high-interest credit cards.

• State income taxes are deductible by law, but state sales taxes are no longer deductible. This onerous situation creates double taxation since sales taxes are paid on after federal tax income. This solution is simple. Revert back to the old law and make all sales taxes deductible. This will tend to increase purchases, benefit the economy, and bring in more federal revenue. Taxes are not a zero sum game. The more income people have to spend the better it is for all citizens and their governments.

• Corporations must be made to shoulder their fair share. In 1960, corporations paid one-third of all federal taxes. By 1970, Congress had cut that to 25 percent. In fiscal 2000, it was further reduced to a ludicrous 17 percent. We should raise it to at least a 25 percent of the pie, relieving the individual taxpayer of an excessive financial burden.

• As medical costs once again have begun to skyrocket, people find it harder to pay their medical insurance premiums. Washington can help by making all such medical insurance costs totally deductible on Form 1040.

• Individuals now pay federal taxes on dividends they receive from corporate stock. This is an onerous case of double taxation since corporations have already paid taxes on the money sent out as dividends. This burden should be lifted in any "reform" of our IRS taxes.

• Pass the legislation introduced in 1999 by Democratic Sens. Pat Moynihan of New York and John Kerry of Massachusetts, which would prohibit the government from using Social Security funds for any other purpose, which is now common practice.

These are only a few of the reforms that are desperately needed to make the IRS code fairer. But there is a final solution to the tax code. That is to scrap it in its entirety only for individuals and relieve the American public of ever having to file a tax return. That answer is the National Retail Sales tax, which was once an obscure idea, but is now one supported by most American people.

Until that day comes, how are we going to get the money to pay for the reforms I've outlined? The answer is simple. Cut the outlandish waste that now permeates Washington, a subject I will detail in my next column.

Meanwhile, citizens should bombard the Senate Finance Committee and the House Ways and Means to pass legislation that will do right by us taxpayers.


Martin L. Gross, a nationally syndicated columnist, is the author of "The Tax Racket," a New York Times" business best seller.


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