- The Washington Times - Monday, September 19, 2005

FLAT TAX REVOLUTION: USING A POSTCARD TO ABOLISH THE IRS

By Steve Forbes

Regnery Publishing,

$24.95, 218 pages

If you read only one book between now and the end of the year, read this one. It will change the way you think about taxation. Common sense, clearly stated, jumps off nearly every one of its 158 pages of text (not counting several useful appendixes).

Publisher Steve Forbes is no newcomer to the idea of a flat tax that would do away with the 9-million-word federal tax code, filled as it is with deductions, credits, exemptions, brackets and confusion. The flat tax is simplicity itself. It would, he writes, “eliminate the possibility of setting up complicated tax avoidance schemes.” He quotes former House Majority Leader Dick Armey as saying, “The flat tax would have a chilling effect on the lobbying industry and would transform the political culture in Washington.”

Twice in losing campaigns for the Republican presidential nomination he plugged the flat tax, although his losses had almost nothing to do with that proposal. It is an axiom in politics that one should not make a major new idea the centerpiece of one’s campaign, for the vagaries of politics make it impossible for the idea to be properly absorbed and debated.

Mr. Forbes is much better able to campaign for the flat tax today, away from partisan politics. Recently in Australia for a conference, he lobbied Prime Minister John Howard to adopt the concept.

In 1962, economists Milton and Rose Friedman first proposed a flat-rate income tax. In the 1980s, economists Alvin Rabushka and Robert Hall devoted a book to it. Now comes Mr. Forbes with an updated, comprehensive and convincing argument for it.

Congressional efforts to reform the federal tax system can end up doing more harm than good, he says. Even Ronald Reagan’s celebrated 1981 and 1986 tax reform bills were treated by lobbyists as “Christmas trees” on which to add “ornaments” benefiting particular clients. Last year’s American Jobs Creation Act may be the worst example. It set out to abolish a $5 billion annual export subsidy, but ended up adding $140 billion in tax breaks, including $8 million for bow-and-arrow manufacturers. Wags called it the No Lobbyist Left Behind Act.

Mr. Forbes says the maze of tax breaks creates different liabilities for people with similar incomes. And, the misnamed Alternative Minimum Tax (really the Alternative Maximum Tax), passed in the Lyndon Johnson days to catch a handful of wealthy citizens who escaped taxes through shelters, now forces millions of middle-class families to pay ever higher taxes.

Complying with this crazy quilt costs the American public $200 billion a year, according to the Office of Management and Budget’s estimate.

What to do about this mess? A commission appointed by President Bush is wrestling with this question. Reportedly, it is working to simplify the tax code, a noble but ultimately fruitless effort. The panel is said to be considering a Value Added Tax (VAT), beloved by European governments, as a substitute for the income tax. VATs have a way of creeping up and up wherever they are used. A third idea is a consumption tax, to replace the income tax. This would reward savings, but would almost certainly lead Congress to grant ever more exemptions, rebates and “adjustments,” rendering it a mess.

The flat tax suffers from none of these ills. It could become law by an act of Congress.

Mr. Forbes calls for a flat rate of 17 percent on income over $46,165 for a family of four (each adult taxpayer would get a $13,200 exemption). Fiscal Associates, the economic forecasters Mr. Forbes has used for make his flat tax model, predicts new asset growth of $6 trillion within 10 years and $892 billion in new payroll taxes because of expanded economic activity. Double taxation would be eliminated from dividends and Social Security benefits would be freed from tax liability.

The book’s charts are easy to understand. One shows a comparison of tax amounts owed in various income categories today versus what would be owed under a flat tax. In all cases, the flat system results in tax cuts. This, even though virtually all present deductions (such as home mortgage interest) would be eliminated.

Mr. Forbes devotes several pages to critics’ arguments and answers each clearly and concisely. Simple, fair, money-saving, growth-generating — all are attributes of the system the author champions with logic and an upbeat style.

The only flaw: Those leery of the flat-tax system, once enacted, could opt for staying with the old system. This may be designed to mute criticism; nevertheless, it defeats two major objectives of the flat tax: eliminating the tax code and all those IRS bureaucrats.

Peter Hannaford is the author of “Recollections of Reagan”(www.imagesfromthepast.com).


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