Bush's Stealth Flat Tax
He's more of a tax reformer than people realize.
Sep 13, 2004, Vol. 10, No. 01 • By STEPHEN MOORE
Bush's latest plan is perhaps the biggest leap of all toward a flat tax. The White House has proposed a dramatic expansion of tax-free IRA-type retirement accounts. This means that large pools of savings by American households would no longer be double taxed. Now imagine that we allowed all savings that Americans stashed away into an IRA account to be sheltered from the IRS. Under that model we would tax income, but savings would be deducted. All that leaves to be taxed is what people consume out of their income (because income minus savings equals consumption). Now the picture starts to come into focus. George W. Bush and his economics team are quietly moving toward a flat-rate consumption tax system without anyone much noticing.
Now for the bad news. The hard part is still left to be done. What many Americans want most from tax reform is clarity and simplicity: They want the postcard tax return, or, better yet, no tax return at all. What forever trips up every politician when it comes to tax reform is the grand compromise: to get a low flat-rate tax requires a broadening of the tax base. This means sweeping away the reams of special interest tax loopholes that pollute the tax code. These tax carve-outs--for everything from housing to child-care expenses to investment in bull sperm and tobacco farming--leave in place a Swiss cheese tax system wherein two families with equal incomes can have vastly different tax payments. A few years ago an exotic dancer gained notoriety for taking a tax deduction for the cost of her breast enlargements, because this was a business write-off. That was no more absurd than Bill Clinton's taking a charitable deduction for underwear and other old clothes he donated to Goodwill.
Economists have calculated that if all these absurd loopholes were closed the federal tax rate could be chopped to about 18 percent and the same amount of revenues would be raised. To protect poor people from paying higher taxes, the first $10,000 to $15,000 of income would not be taxed.
To be sure, there are mountainous political forces aligned to preserve and protect the current tax policy with all its special favors to gold-cufflinked K Street corporate lobbyists. For example, when Steve Forbes campaigned on the flat tax in his 1996 presidential bid, the housing industry spent millions of dollars on a scurrilous campaign full of half truths to discredit the flat tax. Whether George Bush has the spine to combat this murderers' row of influential Washington interest groups is anyone's guess. The flat tax is the ultimate fight of the general interest versus the special interest, or, to put it differently, Washington versus America. Alas, Washington usually prevails in these fights.
But if George W. Bush wants a grand and lasting domestic legacy, other than being the biggest-spending president since FDR, this may be his opportunity to make the history books. He can campaign and win on the idea of creating a 21st-century tax system designed to allow America to compete and win in the global economy. Imagine a flat tax of 18 percent with no double tax on savings, no capital gains tax, no dividends tax, no death tax, a postcard return that takes 30 minutes to fill out, and legions of tax lawyers and accountants out of our lives. This would be rocket fuel for the U.S. economy. And there is no reason it can't be accomplished with Democratic votes. Prominent flat-tax advocates in recent memory include Democrats like Jerry Brown, who nearly won the Democratic nomination for president in 1992 with a flat-tax agenda, and Leon Panetta, Bill Clinton's chief of staff.
On the back wall of my office is a copy of an old Peanuts cartoon. Snoopy sits atop his doghouse and taps out a letter on his typewriter: "Dear IRS: Please take me off your mailing list." That's the way tens of millions of Americans feel. If Bush can fix our Byzantine tax system, and prevail where so many others before him have failed, there is almost no enemy--foreign or domestic--he can't conquer.
Stephen Moore is president of the Club for Growth and a senior fellow in economics at the Cato Institute.