Commentary

Bold Ideas About Taxes

By Stephen Slivinski
This article was published in the Detroit News, August 22, 2004.

When a passage from House Speaker Dennis Hastert’s recently published memoir was leaked to the media on Aug. 2, outlining his goal of abolishing the Internal Revenue Service and ditching the current income tax code, some were inclined to write the idea off as the product of a slow news day.

Yet the next week a supporter of President George W. Bush asked him about the idea at a re-election rally in Florida, and the president said it’s worth serious consideration.

Speculation quickly turned to whether this idea would have a place in the president’s GOP convention speech. It soon became obvious that this idea was touching a nerve with voters.

What gives?

Anyone who has ever filed a tax return would likely have some sympathy for what Hastert is proposing. The complexity of the tax code saps entire days from our lives: By the government’s own estimates it takes taxpayers 28 hours and 30 minutes to complete an average tax return — 42 minutes longer than last year.

The official tax rules now span more than 60,000 pages. Reading them front to back would be akin to reading “War and Peace” 40 times — and about as enjoyable.

In fact, the tax code is so complex even the Internal Revenue Service (IRS) can’t figure it out. A Treasury Department investigation discovered recently that IRS help-center employees provided the correct answers to tax filers only around 50 percent of the time. You could get just as good an answer to your tax question by simply flipping a coin.

But what if you could get rid of the forms and the fuss?

The best way to do that would be to replace the income tax completely — tear it out by its roots — and replace it (along with the corporate income tax, the estate tax, the capital gains tax and most excise taxes) with a national sales tax.

Imagine you cash your paycheck, take what you need to buy groceries and pay the bills, and put the rest into savings or toward paying off debt. Under the current tax system, you still have to report all that money to the IRS and you would have to pay tax on most of the dollars you earned, regardless of whether you spent it or saved it.

What’s worse is that the dollars you saved will be taxed again. Assuming you didn’t place your savings in a tax-deferred savings fund like an individual retirement account (IRA), the interest earned on that savings would be subject to tax, too.

Under a national sales tax, by contrast, the dollars you spend are taxed, but the dollars you save are not. You pay the tax at the cash register. And there will be no more intrusion into your personal finances by the IRS.

Perhaps best of all, because the income tax and all other taxes that penalize investing and saving will no longer exist, there would be a boom in economic growth.

Getting rid of the income tax would restore a great deal of accountability to government. Because the income tax system is so complex, taxes all sorts of income at various different levels and is hidden in the prices of so many goods, the true cost of government is shielded from taxpayers.

Imagine seeing how much you actually pay in taxes with each transaction. With such visibility, the political pressure to keep the tax rate low would be intense.

A big idea is just what President Bush needs to show voters he is serious about creating an innovative domestic agenda for his next term. A promise to reform the entire federal tax system is just such an idea. A commitment to a national sales tax to replace the income tax would be an even better and bolder one.

Stephen Slivinski is director of budget studies at the Cato Institute and co-author of the forthcoming Cato study, “A Fiscal Policy Report Card on America’s Governors: 2004.”