News Release

October 17, 2001

Federal income tax was a historic mistake, study shows
Consumption-based tax, such as the flat tax, is the answer to simplify federal taxes

WASHINGTON—The federal income tax code is 45,662 pages long and it gets longer every year. This growing complexity causes myriad problems for taxpayers and tax collectors. There apparently is no way to stop the income-tax code vortex, a spiral of continual change and nonstop growth in rules. The federal tax on income was a historic mistake. It's time to recognize this mistake and replace the income tax with a consumption-based alternative.

The problem can be solved by scrapping the current system and implementing a flat tax, a national retail sales tax, or another simple consumption tax alternative, says Chris Edwards, director of fiscal policy studies at the Cato Institute, in the policy analysis "Simplifying Federal Taxes: The Advantages of Consumption-Based Taxation." Those tax systems would eliminate many of the most complex aspects of federal taxation, including depreciation accounting and capital gains taxation.

"This years $1.35 trillion tax cut reduced income tax rates and modestly liberalized the tax rules for retirement saving plans," says Edwards. "However, the new tax law did not slow the progression of the tax code toward increasing levels of complexity. In fact, the law made 441 changes to the tax code and created a complicated series of phase-in periods for tax changes.

"Since the mid-1980s there have been 7,000 federal tax code changes and a 74 percent increase in the number of pages of tax rules. Complying with federal tax requirements wastes 6 billion hours each year as families and businesses fill out tax forms, keep records, and learn tax rules."

As the economy grows more complex and dynamic, the current income tax will become a greater drag on business efficiency and individual prosperity, says Edwards. A simpler tax system would improve business planning and simplify personal financial planning. A flat tax, for example, doesn't tax the returns to saving at the individual level at all, with that result that families could manage their money much more efficiently for priorities of their choice—not the preferences dictated by Washington.

"Simplifying Federal Taxes: The Advantages of Consumption-Based Taxation"