Reason Magazine - Contributors > Grover Norquist
- Rewriting the Code
For the first time since the Great Depression, congressional leaders are seriously considering sweeping alternatives to the Internal Revenue code. Two Texans in the House of Representatives are leading the calls for drastic change. house Majority Leader Dick Armey wants to replace the current income tax with a single-rate tax with no deductions other than a generous personal exemption. Ways and Means Committee Chairman Bill Archer would instead scrap the Internal Revenue Code entirely and replace it with a flat-rate national sales tax.
Would either proposal enhance civil liberties and raise enough money to operate the federal government? REASON assembled four knowledgeable advocates to discuss the possibilities.
No More Kidding Around
By Edward H. Crane
At the end of a brilliant section on taxation from his book Power & Market, the late Murray N. Rothbard writes, "Our conclusions are twofold: (1) that economics cannot assume any principle of just taxation, and that no one has successfully established any such principles; and (2) that theneutral tax, which seems to many a valid ideal turns out to be conceptually impossible to achieve."
I cite Rothbard's conclusion--which he persuasively develops in the book--by way of disclaimer. I do not favor a federal retail sales tax. I support replacing the current Byzantine system of financing the federal government with a federal retail sales tax. I do so for the simple reason that it will make it easier for Americans to reduce their overall tax burden.
We can replace the personal income tax, corporate income tax, inheritance tax, gift tax, and the Social Security payroll tax with a simple federal tax on retail sales and services of between 25 percent to 30 percent. There are economic, civil libertarian, and political advantages to doing so.
Before discussing those advantages, it's worth emphasizing two more disclaimers. First, what we are talking about here is a complete replacement of the existing federal tax system. Critics of a federal retail sales tax who point to the danger of politicians simply adopting the retail sales tax on top of reduced rates for the present system have a very legitimate concern. The last thing we should want would be a sales tax in addition to the taxes we already have. The movement for the sales tax must reject any deal that allows the income tax to survive even at one-half of 1 percent.
Second, it must be made clear that we are not talking about a value-added tax. The European experience with the VAT makes it clear how easy that tax is to increase, primarily because it is hidden at the various levels of production. It is true that there will be some problems involved in defining "retail sales," but they are not insurmountable problems. The point is that the retail sales tax will be much more visible than a VAT and, hence, much harder to increase.
A theoretical case for the preferability of a retail sales tax can be made on the basis of the fact that consumption is the purpose of an economy. It is not investment, saving, or even employment. It is consumption. Government lives off of the economy. Let, then, the burden of government fall precisely where the economy is headed: on consumption. Such a tax, while unquestionably damaging to the economy and our standard of living, nevertheless will act to reduce the damage done to the economy compared to other taxation schemes.
A study done for the Cato Institute by Boston University economist Laurence J. Kotlikoff found that replacing the income taxes with a retail sales tax would more than double the savings rate (after all, the whole world outside consumption becomes an IRA), increase the capital stock by a third, and boost national output by nearly a half trillion dollars. One need not accept Kotlikoff's econometric model as an instrument of precision (or even crude accuracy) to see that by eliminating the income and inheritance taxes, including the tax on saving, there is bound to be a huge boost in output and productivity. Entrepreneurial incentives could not be more enhanced within the revenue constraints currently imposed by the federal government.
Thus, on the economic front the retail sales tax is an enormous improvement on the current system. So is Rep. Dick Armey's proposed flat income tax. It has been carefully constructed and, if left alone by politicians, would have virtually the same economic impact as the sales tax.
The problem is--and this is where the civil libertarian aspect comes in--that the flat tax remains a tax on income and keeps in place the Internal Revenue Service. The retail sales tax abolishes both. As the readers of REASON are well aware, there is no more intrusive and abusive agency of the federal government than the IRS. With a staff of more than 120,000 agents and auditors, the very mention of the IRS strikes fear in the hearts of Americans who, in theory, live in the land of the free.
The list of IRS intimidations, civil liberties abuses, snooping, and general ineptitude continues to grow. And for 1995 and 1996 we are promised particularly harsh audits, supposedly necessitated by the estimated $150-$200 billion in annually uncollected taxes.
Civil liberties abuses under the income tax regime are blatant and well documented. We are, for instance, assumed guilty and must prove our innocence when charged with violating the Internal Revenue Code, a code so complex and illogical that the IRS itself only pretends to understand it. The IRS regularly undertakes "civil forfeiture" proceedings that deny Americans their constitutionally guaranteed right to due process of law by confiscating property to pay for alleged (but not proven) tax deficiencies.
Moreover, in a study commissioned for the IRS itself a decade ago, Arthur D. Little Co. estimated that Americans spend some 5.4 billion hours of work a year just to comply with the tax code. Author James Payne puts the cost of those hours at about $250 billion per year, or about one-third of what the federal government hopes to reap from individual and corporate income taxes in 1995. In addition, Payne argues, the true cost of compliance should include the disincentives to savings and work and the costs of enforcement, litigation, and tax-distorted investments. All that could easily double the cost of this bizarre tax system to the American people.
Another benefit of switching from a high-compliance-cost system to a low-cost system is that it would free 120,000 tax bureaucrats and untold tens of thousands of bright lawyers and accountants in the private sector to engage in productive work that increases our standard of living--and would probably make them feel better about themselves, to boot. Flat-tax advocates' arguments that a sales tax would have high compliance costs are disingenuous; 45 states already collect sales tax.
But the best reason to support replacing the income tax with a retail sales tax is political. Today when someone mentions tax reform, Americans wisely grab their collective wallets. The politicians and bureaucrats of the New Class have down to a science the business of playing one tax-paying group off against another: farmers against manufacturers, rich against poor, old against young, workers against management, and on and on.
The tax system in America is so complex that it's virtually impossible to create a sense of taxpayer solidarity against taxes. Rather, each interest group spends its time lobbying to increase taxes on other groups in the (usually) futile hope that its own taxes can be reduced. That the complexity of the tax code is a key to the politicians' ability to continually increase taxes while constantly talking about decreasing them should be obvious.
The federal retail sales tax ends all that. Whether it's set at 20 percent, 25 percent, or 30 percent, Americans need only vote for the candidate who promises to lower it--the most. Suddenly we do have taxpayer solidarity. Suddenly, with no withholding or other hidden taxes, everyone is aware of the cost of government every time he or she buys a product. Lowering federal taxes suddenly becomes much easier.
The flat income tax was the cutting-edge initiative during the Reagan years, and many supply-siders such as Bruce Bartlett, Jack Kemp, and Grover Norquist still support it for that reason. But the mood of the American people is considerably more radical today. They want to abolish the income tax, and it would be a tragic error to allow old political allegiances to get in the way.
The energy behind abolishing the income tax and eliminating the IRS is the same energy behind the term-limits movement: No more kidding around. No more trusting the politicians to do what they say they'll do. After passing a statute, Congress should report out a constitutional amendment, replacing the 16th Amendment and limiting federal revenue to taxes on retail sales and services. The people want to take back control of government and then radically downsize it. That means cutting spending, which first requires cutting taxes, which is what the federal retail sales tax will make much more feasible.
When Sen. Richard Lugar (R-Ind.) campaigns for the presidency on a platform calling for the abolition of income taxes and Bill Archer (R-Tex.), the chairman of the powerful House Ways and Means Committee, says he favors scrapping income taxes and replacing them with a sales tax, you know this is no longer an idea confined to the political fringes.
If mainstream politicians like Archer and Lugar feel that intensity of public support for this idea, the time has come for all advocates of a free society to