Radical Tax Reforms Gain New Attention
JUST days before the April 17 income tax due date, the H & R Block office next to a Baltimore Burger King is filled with customers. It's 8 p.m., and the computers are humming for filers who flock to this convenience store of accounting firms, in a scene repeated across the country.
All told, some 115 million individuals and 6 million corporations will file to the Internal Revenue Service (IRS) by April 17. They will spend nearly $200 billion this year for services to guide them through the labyrinth of state and federal tax codes.
Many of these harried filers, faced with the complexity of their 1040 forms, undoubtedly wish for a simpler United States tax system. There's a chance their desire may soon be met: In recent months, many legislators on Capitol Hill have begun to call for a radical overhaul of the revenue code.
Proposed changes would go far beyond the tax cuts pushed by the GOP as part of their Contract With America. Some lawmakers are pushing a ''flat tax,'' under which taxpayers would all pay the same, reduced rate. Others would eliminate the IRS altogether, via imposition of a national sales tax in place of the familiar income tax system.
The seriousness of these efforts can be seen in how much support they are getting among candidates for the GOP presidential nomination. Sen. Bob Dole (R) of Kansas, in announcing his candidacy this week, said ''we need a president committed to making our tax system lower, fairer, flatter, simpler.''
Republican presidential hopefuls Sens. Arlen Spector of Pennsylvania and Richard Lugar of Indiana have declared war on the IRS and promised new ways to generate government revenue.
Ruling on regulations
Even before next year's November election, a National Commission on Economic Growth will sort through new tax proposals. Last week, House Speaker Newt Gingrich (R) of Georgia and Senate majority leader Dole, who set up the commission, empowered it to examine the 9,000-page federal tax code, replete with ''thousands of regulations, rules, and red tape.''
Before the commission issues its findings in September, former Cabinet member Jack Kemp and company will have plenty of new plans to review. Some of their proponents are floating trial balloons to test public opinion.
The first in the air comes from House Ways and Means chairman Bill Archer (R) of Texas, who has been trying to galvanize support for a broad-based consumption tax. He would like nothing better than to put the IRS out of business by supplanting the income tax with a national sales tax -- a value-added tax -- on purchases of goods and services. There are several variations on the theme.
Then there is the ''if you can't beat 'em, join 'em, but at a lower level'' crowd: the so-called Flat Taxers, who want all Americans taxed at the same reduced rate -- somewhere between 17 and 20 percent.
When Senator Spector announced his flat-tax plan to ''enable Americans to file their return on a postcard'' last month, he appealed to taxpayers who are fed up with the roughly 5 billion hours they spend a year filling out forms.
He claims that allowing just two deductions -- one for charity, the other for interest on home mortgages -- will save Americans the time and money they currently expend on tax returns and add to the growth of the US economy.
But Rep. Dick Armey (R) of Texas rejects that claim in his flat-tax bill, which exacts a compromise from US taxpayers. If they want the lower flat rate, Mr. Armey's Freedom and Fairness Restoration Act says taxpayers have to be willing to give up deductions and loopholes, such as mortgage interest payments.
The most compelling reason for the flat tax, says John Goodman, head of the Dallas-based National Center for Policy Analysis, is that it is ''generous to low-income families'' and slashes taxes on investment income to generate economic growth.
That's not convincing to Alice Rivlin, director of the White House Office of Management and Budget. Ms. Rivlin calls the flat tax ''an illusion.'' She argues that ''even with a broad definition of income, I don't think you can go to a single rate and be fair.''
And she is troubled by the regressive nature of flat and sales taxes, saying they would fall heavier on the poor.
Still, President Clinton's budget chief recognizes a national disgust with ''too complicated a ... code.'' She is ''very intrigued'' by a more innovative consumption tax, devised by Sens. Sam Nunn (D) of Georgia and Pete Domenici (R) of New Mexico.
It would boost savings by giving people unlimited savings deductions (through IRAs, for example), and tax them on everything they consumed. But she warns of a kink that Senators Nunn and Domenici have yet to work out: Older people who have been taxed on their lifetime savings would be taxed on money when they wanted to spend it.
Achieving tax fairness by overhauling the system is tough to justify ''because there is a value in predictability,'' Labor Secretary Robert Reich told reporters at a Monitor breakfast yesterday.
For Washington tax accountant Dalbert Ginsberg, radical tax changes are something to cheer. ''It's going to be booming for my business, because there will be absolute chaos, and everybody will try to figure out what it all means.''
But, if the simplified approach lasts over the long term, ''business prospects are awful.''
More likely, he says, lawmakers will again remake the tax code shortly after they legislate the upcoming changes. ''They're doing it so fast,'' he says ''they'll have another tax act in five years, because they didn't consider their earlier damage to the economy.''