When the president's Advisory Panel on Tax Reform released its much-leaked recommendations two weeks ago, my first reaction was an involuntary gag reflex, the sort of thing that happens when you get too close to dog poop.
I know most people feel the same way--- even if they haven't spent as much time smelling tax reform as I have.
When I asked readers in 1995, more than 6,000 sent postcards and letters (not to mention a few T-shirts and posters) to let me know they despised the miserable 17,000 page atrocity we call the tax code. Then, and in any number of surveys since then, Americans have expressed a desire for a truly simple tax.
Our desire for a simple tax system cuts across all lines: rich and poor, young and old, liberal and conservative.
But the politicians we elect haven't listened. They still don't listen.
For all the changes, year after year after year, the tax code is still an atrocity in 2005. It promises to get worse as the hated Alternative Minimum Tax and the tax on Social Security benefits extend to more and more people.
To its credit, both of the Advisory Panels' proposals include eliminating the AMT and simplifying the tax on Social Security benefits.
Too bad nothing will happen.
As Professor Laurence J. Kotlikoff at Boston University observed in a recent telephone interview, eliminating the AMT may be a good thing, but it is no match for the organized defense that full deductibility of home mortgage interest has. Not to mention the deductibility of state and local taxes. Or employer-paid health insurance.
Few things are defended with more passion than the deductibility of home mortgage interest. Mention touching it, and the Realtors and builders are ready to march on Washington. They vow to protect all those sorrowful people who have been forced to carry $500,000 mortgages.
Bottom line: This tax reform is either dog poop or dead meat.
The panel will achieve obscurity because it has been timid to a fault.
If the world is flat, as Thomas L. Friedman suggests in his book "The World Is Flat" and as Richard L. Fisher at the Dallas Federal Reserve Bank says in his speeches, then we need to replace the tax code. The tax code is beyond reform.
We need to embrace an entirely new tax system. We need a tax system that won't punish capital, labor, or saving. Right now, we're punishing all three. Moving "toward" a consumption-based tax system isn't enough.
We need to tax consumption. We need to stop taxing labor, capital, and savings.
We can't do that without dealing with the employment tax. Yet it wasn't even mentioned by the panel. (Why? Their job was narrowly and unimaginatively defined as reforming the income tax.)
In fact, most workers pay more in employment taxes, directly or indirectly through their employer, than they pay in income taxes.
In fact, the employment tax has been the fastest rising and most regressive tax for over half a century.
In fact, the employment tax is one of the impediments to creating new jobs in America.
In fact, the way to give American working stiffs a real and lasting tax break is to eliminate the employment tax. We can do this by replacing it with the same national sales tax that would replace the income tax and every other tax.
A national sales tax that swept away every complexity of the existing system would clear the decks for the United States to become more competitive than we already are. It would drop interest rates. It would support stock and bond prices. It would create visceral incentives to save. It would end the tangle of rules and exclusions that now govern tax deferred saving.
That's why I favor the Fair Tax proposal. One tax, once, on what you buy. And if you don't have much income, you get an automatic pre-bate of the tax. The poor would pay no taxes, employment or income.
Want to learn more? Visit www.fairtax.org. On the web:
Tuesday, May 17, 2005: Young workers face a harsh tax reality
Sunday, March 27, 2005: It's flat out time to chuck the tax code
Tuesday, January 20, 2005: New deal for this century
Sunday, January 18, 2005: A legacy of social insecurity
Sunday, April 21, 1996: How to create opportunity for the next generation
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