A Complicated Cut
Lower rates are great. But a flat tax would be even better.

by PETE DU PONT
Wednesday, May 30, 2001 12:01 A.M. EDT

A $1.35 trillion tax cut is about to be signed into law by President Bush. It gives a $300 rebate to all taxpayers this year and bit by bit over the next 10 years cautiously cuts tax rates, eases the marriage penalty, doubles the child credit, eliminates the death tax and expands IRAs. And on the magic day of Dec. 31, 2010, all of these changes go away and the tax code--rates, credits, deductions and all--reverts back to what it is today.

Reductions in the tax rate will help boost the economy and create opportunities for individuals, so the bill is a good thing to have enacted. But has the legislation improved the tax system in the United States?

Last time I looked there were 742 different Internal Revenue Service tax forms and 254 publications explaining them, all contained in the seven million words that make up our tax code. When the president signs the tax cut, there will be a few more forms and a few more regulations and pages in that tax code. And America will still have a Byzantine, loophole ridden, incomprehensible and frustrating tax system. As Albert Einstein said, "The hardest thing to understand in the world is the income tax." It is no simpler after the Bush tax cut than before.

We ought to junk the whole mess and replace it with a flat tax that any one of us could fill out on a postcard. Add up your income, subtract a tax-free allowance of $10,000 for each person in your household, and send the Treasury a check for 19% (or 18 or 20, you can pick the number) of what is left.

The Tax Foundation, using IRS estimates of the time it takes to fill out its forms, concludes that "taxpayers spend 4.3 billion hours a year" filing returns and complying with the tax laws, at a cost to the economy of $125 billion.

One of the reasons it costs so much in time and dollars to comply with tax law is the complexity of the code. Daniel Mitchell of the Heritage Foundation estimates that between 1986, when the last major tax reform was enacted, and 1998 approximately 6,000 changes were made to the tax code. "In the last five years alone, Congress has approved more than 2,000 tax changes, adding 5,000 pages and new provisions and explanatory text to the tax code," concludes Kathy Kristof of the Los Angeles Times.

Not even the IRS's 98,000 employees can keep up with the ever changing complexity of the law. The General Accounting Office (GAO) recently checked up on IRS assistance to taxpayers. It found that 37% of the calls to the IRS's hotline went unanswered. When the IRS did answer the phone it got the answers wrong 47% of the time. The net effect is that only one-third of all callers got accurate advice from the IRS. It's not that IRS employees are stupid or incompetent (although they should answer their telephones); they are ordinary civil service employees who are as baffled by the intricacies of the code as the rest of us. The fault lies with the code more than with the people.

And it is not just the IRS. Recall the famous 1997 Money magazine test that asked 45 tax professionals to calculate the tax liability of a hypothetical family. Not one got the correct answer, Dan Mitchell notes, and "fewer than one in four even came within $1,000 of the correct figure."

The American Bar Association Section of Taxation and the American Institute of Certified Public Accountants recently identified 16 areas of the tax code that were so hopelessly complex that they should be repealed or substantially modified. Many code provisions phase out tax exclusions, exemptions, credits or deductions as income rises. But there is no consistency in when or how the phase-outs occur. They are "hidden tax increases that create irrational marginal income tax rates" and make it difficult for taxpayers to know "whether the benefits [being phased out] will ultimately be available," their report said. In the new tax bill there are at least 10 phased in repeals of these phase outs, adding another layer of incomprehensibility to the code.

There are eight education incentives in the tax code: tuition credits, education IRAs and so forth. Each one is complex, individual and has different tests to determine eligibility. Most complex of all is the alternative Minimum Tax. In March, GAO congressional testimony noted that the AMT "operates as a separate tax system that parallels the regular individual income tax system but with different rules" for calculating income, tax liability and the use of credits. Married taxpayers who consider paying separately, for example, "have to compute their taxes four different ways" to see what tax they have to pay.

In short, the current tax code is costly, often irrational and too complicated for sensible people to understand. It is a web of complexity that members of Congress use to reward their friends and punish their enemies, and manipulate to get themselves re-elected.

It is time to replace this monstrous system with a flat tax, a simple percentage of income over and above a per person annual exemption. The flat tax would be fair, for it would treat everyone equally. If your income is 10 times your neighbors', you should pay 10 times the tax, not five times because Congress likes you or 20 times because it does not.

The flat tax is progressive, as the table below shows, for the higher your income the greater the percentage of it you pay in taxes. Shown is the tax due of a family of four assuming a 19% tax rate and $10,000 personal exemptions:

Such a flat tax would be simple to pay and easy to understand. Everyone would know what everyone else pays, which would increase the credibility of the system in the eyes of taxpayers. The phase-ins and phase-outs, the thousands of fine print rules and regulations, lobbyist-induced tax loopholes and the mind-numbing complexity of the current system would all be gone. And we would get our 4.3 million hours back to be with the kids, help our favorite charity or work to earn some more money.

Two hundred and twenty-five years ago Benjamin Franklin, Thomas Jefferson and others put their John Hancocks on the Declaration of Independence, which listed as one of their grievances against King George that "he has sent swarms of officers to harass our people and eat out their substance." Not a bad description of the IRS and our present income tax system. A flat tax would not only be fairer, but would lay to rest an original American grievance.

Mr. du Pont, a former governor of Delaware, is policy chairman of the Dallas-based National Center for Policy Analysis. His column appears Wednesdays.