Senators heard outrageous testimony last week about IRS abuse of taxpayers. The acting commissioner apologized, but the real blame lies squarely with the politicians who professed to be so horrified at what they heard.
They gave the IRS enormous power, handed the agency an ever-more-complicated tax code to enforce and pressured it to squeeze every last dollar out of taxpayers in order to balance the budget while increasing federal spending. So what did these senators expect?
Republicans talked grandly about simplification but this year passed legislation that added 285 new sections and 824 amendments to the tax law, making the code 9,451 pages long. Even expensive tax lawyers can't understand it. That leaves IRS agents free to make their own Talmudic interpretations -- and then take away your house.
Now Congress wants to "reform" the IRS by changing its management practices. That won't help. The problem is not administration; it's policy. Don't reform the IRS -- reform the tax system.
We can abolish the IRS completely by substituting a national sales tax for the income tax. As recently as a few months ago, I thought this was a loony proposal, but after listening to Rep. Bill Archer, R-Tex., its major proponent and, coincidentally, the chairman of the tax-writing Ways and Means Committee, I think it's a respectable, powerful idea -- if not perfect, certainly far better than what we have now.
Instead of paying the government a percentage of what we earn, we would pay the government a percentage of what we buy -- through a federal sales tax on top of the state sales tax.
There would be two immediate benefits: (1) the IRS would vanish from the lives of individuals, and (2) the incentive to save would soar, boosting investment and increasing jobs and growth.
There are also two problems: (1) faced with a federal sales-tax rate of 15 percent to 20 percent, many businesses would find the temptation to cheat irresistible, and (2) the sales-tax burden on poorer Americans, who pay little or no income taxes now, would have to be relieved through rebates.
Compliance and fairness are thorny issues, but the national sales tax deserves serious consideration. And that's just what it's starting to get. In a debate at last weekend's International Conservative Conference in Washington, Rep. Billy Tauzin, R-La., an advocate of the sales tax, slugged it out with Rep. Dick Armey, R-Tex., who backs a flat income tax. They'll be taking this entertaining and edifying show on the road to Columbus, Ohio, on Oct. 10, then to Atlanta, Chicago and more.
Next, early in 1998, it's likely that the GOP leadership will introduce a bill for comprehensive reform of the tax system. Currently, the preferred vehicle is the flat tax. In the Armey version, that means the elimination of all deductions and credits, no tax at all on the first $30,000 of income for a family of four, then a 17 percent tax on all income. No income will be taxed more than once, thus ending the bite on dividends, interest, capital gains and estates.
While the flat tax is attractive, the sales tax may outstrip it. "The income tax at this time is incompatible with freedom," said Tauzin during the debate. It was a timely remark after a week of hearings on IRS abuses. Under the flat tax, the IRS survives, but it won't be as intrusive or interpretive. Tax reform is also the route to effective campaign finance reform -- since making changes in the tax code is the main objective of special-interest groups. A flat tax or sales tax could end tax lobbying forever.
But that will happen only if these systems are pure. Archer argues that the sales tax is superior since interest groups would certainly decorate a flat tax with deductions for home mortgages, charitable contributions and state taxes. More exceptions would follow, and the flat tax would soon revert to the current code, filled with different rates and preferences. Look what happened to the 1986 reforms.
But the biggest problem for the sales-tax crew is that Americans just can't imagine life without an income tax. Many people, for instance, will scream for their mortgage deduction, not realizing that deductions against income are superfluous if the tax on income is zero. But it's hard to make folks understand this blissful fact.
Still, whether with a sales tax or a flat tax, the system has to be changed. That's the real lesson of the IRS hearings.