Updated: May 3, 2013 12:14PM
Originally published: February 3, 2005
Two months ago, right after the presidential election, I wrote a column about the possibility of tax reform. At the time, I said that while either the flat tax or national sales tax proposals deserved some consideration, it was highly unlikely that we’d have any meaningful tax reform because of the pressure that special interest groups would put on politicians of both parties. After all, I reasoned, why spend millions of dollars to get a candidate elected if he or she can’t do you some favors when it comes to writing tax bills?
So, I rightfully figured that real tax reform was a dead issue -- until I read a proposal by Stephen Moore of the Cato Institute. The concept is so incredibly simple and so absolutely appealing, that I asked permission to quote extensively from his OpEd article, which appeared in the Wall Street Journal on Jan. 27 and is available in its complete form at www.Cato.org.
Figuring that many of my Sun-Times readers might not have seen the original, I hope these excerpts will trigger interest and discussion -- and action. Since Moore explains his plan so clearly, many of the lines below are taken directly from his writing.
Free to choose
The concept is called the “Freedom to Choose Flat Tax.” The idea is to create a voluntary alternative to the current tax system: a flat rate. The flat rate tax would be easy enough to calculate and report on a postcard, and would be offered to tax filers as an alternative to -- rather than a replacement of -- the current tax code.
There would be no deductions, except for a “generous” personal deduction and child deductions. Every other bit of income would be taxed at a flat 20 percent. That would apply to businesses as well as individuals.
No one would be forced to use this alternative tax code. It would be offered along side the current tax system, which already forces many taxpayers to compute their taxes in two different ways: the standard form, and the Alternative Minimum Tax. Under Moore’s proposal, taxpayers could have the option of a flat 20 percent tax rate on all income.
Moore is willing to bet, as I am, that many people would be delighted simply to add up their taxable income from salary, wages, interest, dividends, capital gains, self-employment -- all the information reported on W-2 forms and 1099 forms -- and then just send in a check for 20 percent!
When you think of all the time, money and aggravation you’d save in tax preparation, it might be worth it to just file the flat tax postcard return, even if you’re paying slightly more in taxes.
Who could complain? No one would be forced into the system or required to pay higher taxes. You could still compute your taxes the old way, using deductions for mortgage interest, and real estate taxes, and charitable contributions. If that resulted in a lower tax bill, you’d have the option of sticking with the current system. And everyone using the flat tax would pay the same percentage of their income in taxes, no matter how much they earn.
Keeping the old system intact for those who choose it could deflect the inevitable political pressure from special-interest groups that benefit from the current system of deductions.
No one’s taking them away. The old system would still be around, if people wanted to go through the hassle.
Once you file the flat tax return, however, you’d be in the new system for good. And all new workers would automatically start out in the new system. Over time, the old (current) tax code would simply become obsolete, as fewer and fewer people would choose to use it.
Enacting this Freedom to Choose Flat Tax could be simple. Congress wouldn’t have to create a lot of tax-writing committees and complicated rules. Moore says it would take only a two-thirds vote of both houses of Congress to create this system of an Alternative Maximum Tax at 20 percent.
An economic boom
And he predicts an economic boom -- an extra 10 percent annual growth in the economy -- as Americans save the $225 billion a year it costs to comply with the current Byzantine tax code.
Who could be unhappy with that solution? Well, yes, the tax accountants and advisers might be out of a job. But they’re so clever, I’m sure they could find other productive work. And that’s The Savage Truth.
Terry Savage is a registered investment adviser, and appears weekly on WMAQ-Channel 5’s newscasts. Distributed by Creators Syndicate.