How to achieve substantial tax reform now

Although polls continue to show that fundamental tax reform is among the most popular issues with voters, there is little likelihood that 1998 will see any progress in this direction.

Bill Clinton has said he will oppose any movement toward a flat tax or consumption tax, while congressional Republications appear incapable of coming to an agreement on what tax-reform plan to support. Indeed, almost weekly it seems as if some representative or senator comes forth with yet another tax-overhaul plan that splits reformers into even more competing camps.

The best-known tax-reform plan is the flat tax, sponsored by Rep. Dick Armey (R.Tex.) and Sen. Richard Shelby (R.-Ala.). However, the flat tax has lost support in Congress because it would not completely do away with the Internal Revenue Service.

Bolstered by recent hearings on Internal Revenue Service (IRS) abuses, supporters of abolishing the IRS have turned instead to the national retail sales tax sponsored by Representatives Dan Schaefer (R.-Colo.) and Billy Tauzin (R.-La.).

The flat tax has also suffered at the hands of its own supporters, some of whom have given up hope of enacting it as a complete replacement for the current tax system.. They now favor the flat tax only as an addition to the already bloated tax code, as an alternative tax system.

Also, some former flat-tax supporters have decided that its emphasis on tax neutrality is wrong. They want the tax system to tilt actively in favor of families, even if it means worsening the tax treatment of business and capital. Fred Barnes in the Weekly Standard reports that Family Research Council President Gary Bauer will put forward such a plan in the near future.

Take Interim Steps In the Right Direction

Given the seeming impossibility of developing a consensus on ultimate tax reform at this point, perhaps it is time for tax reformers to lower their sights and concentrate on less comprehensive objectives. It may be possible that those favoring competing tax plans can come to agreement on some interim steps that move in the same direction. This would allow the ball to be moved forward while the debate on ultimate objectives continues.

In a recent paper, longtime Washington tax expert Ernest Christian lays out a plan for reforming the tax code incrementally. By building upon some specific tax changes for which there is already broad support, it is possible to come very close to achieving most of what flat-tax and consumption-tax supporters want simply by amending the current tax code. This, Christian believes, may make it easier politically to achieve substantive reform.

Christian points out that we can essentially convert the current income tax into a consumption tax simply by removing saving from the tax base. This can be done by allowing all individuals an unlimited deduction for contributions to individual retirement accounts, eliminating capital gains taxes on all reinvested gains, and giving businesses an immediate, full deduction for capital investments.

Another key amendment to the tax code would involve elimination of the double taxation of corporate profits. This could be done either by allowing corporations a deduction for dividends paid or allowing individuals to receive dividends tax-free. This would go a long way toward achieving neutrality between capital and labor income.

Although these core amendments to the tax code would not by themselves achieve everything that tax reformers desire, they would come close. It would then be much easier to enact ancillary changes that would bring the code into conformity with all of the goals of tax reform. The alternative to such incremental change may be continued deadlock for years to come.

Mr. Bartlett, a nationally syndicated columnist, is a senior fellow with the National Center for Policy Analysis, based in Dallas, Tex.

Copyright Human Events Publishing, Inc. Jan 30, 1998
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