Tax code is broken; it easily could be fixed with flat tax

Posted: Wednesday, July 02, 2003

They're at it again.

Days after they approved a major tax cut, lawmakers started fiddling with the tax code again. Sens. Blanche Lincoln, D-Ark., and Olympia Snowe, R-Maine, proposed a $3.5 billion measure to extend a child tax credit to low-income families. Sen. Charles Grassley, R-Iowa, proposed making the entire child tax credit permanent. And House Majority Leader Tom DeLay, R-Texas, has vowed to pass $1 trillion in additional tax cuts this year.

In principle, I'm pleased that so many lawmakers seem to realize the importance of reducing taxes. But in practice, not all cuts are the same. Some do virtually nothing to encourage people to work, save and invest more which is exactly what we need to get our economy moving again.

Consider the child tax credit that Lincoln and Snowe pushed through. It will provide an extra $400 per child to families making less than $27,000 per year. But the reason these families didn't get that credit in the law that President Bush signed is because few of them pay any federal income taxes in the first place. Sorry, but this isn't a tax cut it's a federal handout for low-income families.

Will they welcome the money? I'm sure they will. But let's not pretend that a quick stimulus will bring the kind of growth and investment that our economy is starving for. (We've mailed rebate checks before, remember?)

In fact, the only thing most of these tax measures will do is make the tax code more complex. It is 17,000 pages long now, and it's so confusing that even IRS employees don't understand it. Independent surveys have shown that almost half the time, they give citizens the wrong answers to their tax questions.

Lawmakers know they've created a monster, they just don't know how to tame it. Probably because even they aren't sure what's in the tax code: During the debate over Lincoln's proposal, for example, the Senate considered spending $1.4 billion to clear up how the code defines a "child."

Instead of spending our tax dollars tinkering with a broken system, lawmakers should simply scrap the whole thing and start over, with a simple, fair, flat tax. Even when the flat tax rate is set to make sure the government gets the same amount of funding, most people, rich or poor, would pay less in taxes.

Using a flat tax would eliminate the hundreds of IRS forms and thousands of pages of confusing instructions that now confound Americans. These would be replaced with two simple postcard-sized forms.

"Every taxpayer would be treated the same under a flat tax," my colleague Daniel Mitchell has written. "All households would receive a generous exemption based on family size and then pay a single low rate on income above that amount."

What could be fairer?

The working poor would benefit as well. Today, their taxes are withheld and they have to file a return to claim their refunds and credits. Many even hire tax preparers. With a flat tax they would simply owe nothing, and they could pocket the fees they're paying others.

Critics will oppose the flat tax, because they say eliminating deductions would cut charitable giving and decrease home ownership. But research shows that both charity and home ownership are linked to disposable income. And under a flat tax, disposable incomes would increase. Plus, home ownership is driven by interest rates, which would fall under a flat tax, according to a study by the Federal Reserve Bank of Kansas City.

The Senate should have better things to do than debate changes to the tax code every week. Passing a simple, fair flat tax would allow them to move on to other business. Meanwhile, our economy would soar, as Americans suddenly free of a constricting tax code started working, saving and investing as never before.

Ed Feulner is the president of The Heritage Foundation, a Washington-based public policy research institute.



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