Commentary

Tax Reformers, Unite!

The good news is that voters obviously have some desire for a better tax system. The flat tax has been promoted by presidential candidates as diverse as Jerry Brown (1992) and Steve Forbes (1996 and 2000). This year, the national sales tax is getting attention because of Mike Huckabee’s Iowa victory.

The bad news is that the American people have not yet chosen to nominate a pro-tax reform candidate and we are still stuck with the internal revenue code. This is unfortunate since economists have long argued that America’s multiple-rate, loophole-ridden tax code penalizes productive behavior and undermines national competitiveness.

[T]he flat tax and sales tax are both theoretically attractive, but only the flat tax seems to be politically feasible.”

One of the problems is that advocates of tax reform are divided. This split is particularly frustrating since the flat tax and sales tax are virtually identical. Both would junk the current system. Both would restore fairness by taxing at one low rate. Both would eliminate all forms of double taxation, and both would wipe out special-interest loopholes.

The only real difference between the two would be the collection point: The flat tax imposes one low tax rate on income when it is earned, and the sales tax imposes one low tax rate on income when it is spent.

To get rid of the IRS, it would help to have tax reform advocates unite behind one plan. The tricky question is choosing from two good proposals. I have defended the sales tax in speeches, in articles, in the press, and in congressional testimony, but I think the flat tax is a better proposal. Not so much for policy reasons, but rather because of practical concerns. Simply stated, the flat tax and sales tax are both theoretically attractive, but only the flat tax seems to be politically feasible.

For instance, no political jurisdiction in the world has ever successfully replaced an income tax with a sales tax, so why should we believe the United States is different? Moreover, advocates of the sales tax correctly insist that it must be accompanied by complete, irreversible abolition of the income tax in order to prevent politicians from pulling a bait-and-switch and trying to impose both a sales tax and an income tax.

Yet this would require repeal of the 16th Amendment. Would it be possible to obtain the required two-thirds vote in both houses of Congress and ratification from 38 state legislatures? Unlikely.

Even amendments that garner 80 percent support in polls, such as a balanced budget amendment, are unable to get a two-thirds majority in Congress, to say nothing of the obstacles an amendment would face getting three-fourths of the states to ratify. And as noted above, failure to kill the income tax permanently would create the risk that we would be stuck with both an income tax and a sales tax.

To be sure, a national sales tax would yield spectacular benefits for the American economy. Like the flat tax, it would increase incomes, stimulate job creation, boost savings, and reduce political corruption. The key question, however, is whether the sales tax can overcome the political obstacles outlined above.

The flat tax, of course, faces political obstacles as well. The home mortgage and charitable contribution deductions have been thorny issues. Defenders of the status quo also have scored points by falsely claiming that dividend and interest income would be tax-free in a flat tax world, and they have had some success making the same argument about capital gains. There are other politically sensitive issues that haven’t yet been exploited by opponents of the flat tax, such as the elimination of the tax preference for employer-provided health care.

Yet notwithstanding obstacles like these, the flat tax has been adopted in more than 20 jurisdictions. It is sweeping through Eastern Europe and even places like Iceland have adopted the single-rate system. Best of all, the results have been overwhelmingly positive, so there is every reason to think more nations will join the flat tax club.

Perhaps there is a compromise proposal that can unify all tax reform supporters. In the short run, they should rally behind a flat tax. Once that simple and fair tax system is implemented, they can then seek a constitutional amendment that would prohibit an income tax. If that amendment clears Congress, fans of tax reform could unite behind a national sales tax designed to go into effect the day after the 38th state ratifies that amendment.

I don’t think the last part will happen, but if we get a flat tax, the American people will be big winners.

Daniel J. Mitchell is a senior fellow specializing in tax issues at the Cato Institute. He is also an adviser to the Media Research Center’s Business & Media Institute and author of The Flat Tax: Freedom, Fairness, Jobs, and Growth.