- The Washington Times - Sunday, October 27, 2002

Treasury Secretary Paul O'Neil announced earlier this month that the highest economic priority for the White House over the next two years will be a wholesale repair of the federal income tax system. His department is expected to release a plan within three weeks.
Bravo. This is the single most important public policy change that the Bush administration could make to propel faster long-term economic growth for the United States (though a capital gains cut is needed immediately to help the economy short term).
The chairman of the economics department at Harvard, Dale Jorgenson, has projected that a move toward a consumption-based tax system would accelerate economic growth by 1 to 2 percentage points per year. That would be a very big deal over 10 to 20 years. Even a 1percent boost in economic growth rates would mean about a 30 percent higher rise in living standards for middle-class Americans. It would also mean a $20 trillion less debt incurred by the government to pay its bills.
At repeated intervals during the past two decades, it appeared that the proponents of fundamental tax reform, reinforced by the successful reinvigoration of the U.S. economy following the Reagan tax cuts, would succeed in "sunsetting" the tax code and replacing it with a more rational tax on what people take out of the economy (consumption) rather than what they put into the economy (work, risk taking, saving and investment). But the political process in Washington continues to frustratingly slam the brakes on the reform effort.
In fact, the tax code today is far more progressive, has far higher marginal rates and is far more inequitably convoluted than after the Reagan cuts. A decade-long boom driven by historically remarkable technology-based productivity improvement has ended, and the U.S. economy that prospered despite the increased burden of an inefficient federal tax code is now mired in a stubborn recession stemming largely from that burden.
The case for tax reform has been made repeatedly in an unimpeachable way for years now. Suffice it to say that if we can simplify the code and end the multiple taxation of saving and investment, the benefits will include:
cSubstantially faster economic growth.
Less national resources by businesses and individuals wasted on tax compliance
A less intrusive Internal Revenue Service.
True tax fairness, where the marriage penalty, the death tax and other inequitable taxes would be eliminated entirely.
Visibility in taxes so that every person knows exactly how much they are paying for government services.
As both the Kennedy and Reagan tax cuts demonstrated, serious reduction of the high marginal rates caused by selective multiple taxation of incomes and capital at high progressive rates, particularly those levied on the corporate sector, will accelerate growth of savings, investment, output and incomes all incomes.
We would add that the United States is under severe pressure to tax more efficiently, given the competitive nature of the open world economy.
If the United States has forgotten the lessons of the Reagan tax cuts, the rest of the world has not. Relentless reductions of rates, duplications and effective burden taxation on foreign corporations have resulted in transition of the United States from one of the relatively lowest to one of the highest corporate-tax-cost nations.
So how do we get to the promised land? What is the roadmap to tax reform? We've been thinking long and hard on this subject (with the beneficial input of some of the smartest minds around the nation, including people like Grover Norquist, Steve Entin and Jack Kemp). We are convinced that there are a series of incremental steps to tax reform that will pave the road to full income tax elimination.
Mr. Norquist calls this approach the "five easy pieces to tax reform," to which we have added what he assumes, that all households must be protected from taxation on necessities.
The following are the proposed principal incremental steps required to fundamentally transform the IRS code to a fair, simple and economically productive consumption tax system:
cReplace the corporate income tax with a business-transfer tax.
Defer taxation on individual savings until consumed.
Eliminate discriminatory taxation and tax-preference loopholes.
Flatten tax rates so that all pay the same rate of tax, with a tax rebate for the lowest income Americans.
End the capital gains tax, the death tax and the alternative minimum tax.
This proposal borrows the best of all the other proposals we have seen, including the Armey flat tax and the Tauzin sales tax. The plan also shares many of the same features of the Fair Tax proposal, which would eliminate the corporate income tax, the personal income tax and the payroll tax and replace all of this with a national consumption tax.
By pumping growth steroids into the economy, the plan would raise more revenues than it loses because of the lower rates and the abolition of unfair taxes. For those who doubt this, we would point to the recent experience with Russia. Russia, under President Vladimir Putin, recently enacted a 13 percent flat tax to replace a Byzantine tax system similar to ours. Now Russia gets more revenues from the flat tax than it did under the old system with tax rates of 50 percent or more. And Russia has had a very rapid economic expansion since the new plan was adopted.
We believe that a plan like the one we have proposed could be implemented with a combined tax rate of no more than 20 percent. That rate compares with our current tax system that taxes at a rate of up to 75 percent to invest for and receive a dividend, 60 percent on capital gains and 89 percent to invest for an inherited dividend.
Under our plan, no longer will it be necessary to seek economic growth by manipulation of the tax code, social engineering by complex "gives and "takes" and social equity sought from steeply progressive marginal rates that discourage commerce. An optimal tax code that encourages investment of labor and capital, and taxes only proportionate to that which one takes from the economy, excepting only necessities, will provide an optimum balance of fairness, and an optimum basis for growth of prosperity for all Americans.
The only losers would the accountants, tax attorneys and the legions of Washington lobbyists who make their money off of our dysfunctional taxing system.
What's not to like?

Stephen Moore is a senior fellow in economics at the Cato Institute. David Hartman is chairman of the Lone Star Foundation, a policy research think tank in Austin, Texas.

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