By Jan A. Larson

jan[at]pieofknowledge.com

The President's Tax Reform Panel issued their final report last week [1]. The panel's goal was to recommend reforms that would make the tax code "simpler, fairer and more conducive to economic growth."

The panel accurately depicted the sorry state of the tax code, stating that the current code is rewritten so often that "it should be drafted in pencil." They decried the "myriad of tax deductions, credits, exemptions and other preferences" and noted that when the government "extends a special tax break … everyone else must pay higher taxes." They pointed out that there have been over 15,000 changes to the tax code since the last major "reform" effort in 1986 – more than two per day.

The panel said the right things in the first few chapters of the report. It is only when one digs deeper that it becomes clear that the panel's idea of "tax reform" is simply more of the same.

The panel offered two options, the "Simplified Income Tax Plan" and the "Growth and Investment Tax Plan." While either of these plans is preferable to the current code (there is virtually no reform plan that could be worse), both suffer from the fatal flaw that befell the 1986 tax reform. Both keep Congress and Washington K Street lobbyists in the tax business.

True tax reform will not simply plow under the current tax code leaving a fertile field waiting for special interests and reelection- seeking Congressmen and Senators to sew, but will instead pave over the tax field and turn it into a parking lot.

Such reform is possible. Such reform has been thoroughly researched and had been introduced into both the House (H.R. 25) and Senate (S. 25). Such reform is called the Fair Tax [2].

The panel's report contained a table itemizing how the tax code would change for each of their proposals. The items listed included various family credits and child credits, home credits and charitable deductions. There are various savings plans for saving at work, saving for retirement and "save for family." There are provisions for the taxation of dividends, capital gains and interest. More provisions for businesses including record keeping and expensing of investment. An area that would be ripe for lobbyists to sink their teeth into is the proposal for a "territorial" tax system for businesses under one plan and "border tax adjustments" under the other.

Both of the panel's proposals also fail for the simple reason that they continue to require individuals and businesses to continue to keep detailed records and to "voluntarily" report income. This might not be so difficult for wage earners, but for small business owners or the self-employed, the record-keeping requirement would remain onerous.

Does anyone doubt that either of the panel's "reform" plans would need reform again in a few years? If so, one only need look back to the tax reform of 1986. That year the number of tax brackets was reduced to two. On this go-around, the panel proposes reducing the current six brackets to three or four. How did it get from two to six in the first place?

The Fair Tax, on the other hand, is true tax reform. It doesn't simply change some tax credit amounts, eliminate deductions or reward homeowners while penalizing renters. The Fair Tax makes no distinction among taxpayers. There is no record keeping required for individuals under the Fair Tax. April 15 will be just another day.

Those with incomes below the poverty level are effectively untaxed under the Fair Tax. Onerous "hidden" taxes, estimated to comprise an average of 22% of the price of everything we buy today, are removed under the Fair Tax. Taxpayers will see exactly what they are paying for government.

The verbiage in the tax reform panel's report describing the history, many shortcomings and inherent unfairness of the current tax code is quite compelling. However, the panel simply could not bring itself to step away from Washington politics long enough to come up with a plan that would fundamentally change the way Americans pay for government and, more importantly, remove the powerful influence of lobbyists and Congress on the lives of everyday Americans.

The Fair Tax would accomplish both and as such, the Fair Tax is at its core, the only true reform that can stand up to those that would continue to tweak the tax code to serve their special interests, sometimes as often as twice per day.

The tax panel took a cursory look at consumption taxes but was apparently predisposed to reject any plan that called for such drastic reform. The panel's arguments about evasion and compliance under a national retail sales tax ring hollow compared to the evasion and compliance costs under the current tax code. The Fair Tax is not a panacea and is not perfect. No form of taxation will ever be perfect. The best method of taxation will be one in which no individual or group is singled out for preferences, that minimizes the compliance burden on citizens and is (mostly) immune to the whims of legislators. On these points, the Fair Tax is the best solution.

It takes support from "we the people" to make reform such as the Fair Tax happen. There is a significant grass roots effort currently underway to make the Fair Tax a reality, but it requires more citizens to take active roles as advocates of the Fair Tax. Call or write your representative and Senators and tell them that the tax reform panel's recommendations are not acceptable and that Americans want and deserve real tax reform – the Fair Tax.

[1] http://www.taxreformpanel.gov/final-report/
[2] http://www.fairtax.org

Copyright © 2005 Jan A. Larson All rights reserved.
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Jan A. Larson publishes a weekly commentary, "What is the Deal?" at the Pie of Knowledge (http://www.pieofknowledge.com). His work also appears on OpinionEditorials, American Daily, ChronWatch, The Conservative Voice, Capitol Hill Coffee House and NewsBull.

Published - November 2005