TCS Daily

Junk the Code

By Duane D. Freese - November 20, 2002 12:00 AM

"That the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the power to create ... are propositions not to be denied. But all inconsistencies are to be reconciled by the magic of the word CONFIDENCE. Taxation, it is said, does not necessarily and unavoidably destroy. To carry it to the excess of destruction would be an abuse, to presume which, would banish that confidence which is essential to all government." - Chief Justice John Marshall, McCulloch v. Maryland, 1819

Republicans are fond of quoting Marshall in shorthand: "The power to tax is the power to destroy." Neglected too often is the most powerful part of Marshall's statement about how abusive taxation can "banish that confidence which is essential to all government."

That should hold special resonance for Republicans. They have for decades been the party that has pushed hardest for tax reform, focusing in particular upon the structure of the tax system.

Free-market economic theory, championed by Republicans, emphasizes the ideal of tax neutrality. Because taxes can punish, that means that they can distort economic behavior. And such economic distortion makes markets less efficient, the economy less vibrant and freedom less secure.

In order to reduce such distortions - especially the tax system's punishment of savings, investment and work - Ronald Reagan led the charge for lower tax rates and elimination of tax loopholes. Presidential hopefuls Steve Forbes and Jack Kemp, along with outgoing House Majority Leader Richard Armey, championed an even more massive reform - the flat tax.

The GOP House even went so far in 1998 as to pass a resolution by 219-201 to scrap the entire federal tax code by 2001.

Of course, the effort was stymied by a White House under the control of the Democratic Party until Jan. 20, 2001, and by a Senate in the hands of Democrats after April of that year.

But now with control of the White House, Senate and House, the GOP has an opportunity to seek fundamental reform, and the need has never been greater.

In a 2001 study on tax simplification, Congress' Joint Committee on Taxation found the tax code consisted of 1,395,000 words in 693 sections applicable to individuals, 1,501 sections applicable to businesses and 445 sections applicable to tax exempt organizations. A taxpayer filing a 1040 form could face a return of 79 lines with 144 pages of instructions, 11 schedules totaling 443 lines and 19 separate worksheets of embedded instructions.

The corporate tax code was even worse. And the cost to the economy, only for administering and complying with the rules - not including loses in efficiency from the distortions in the code - ranged from a low estimate of about $75 billion a year to a high of $300 billion.

The Tax Foundation, taking a mid-level assessment, noted early last year that compliance with federal tax laws requires the equivalent of 2.7 million full-time workers. That's more than the federal civilian payload, about double the military force and three times the number of police on the street.

All of this did not include the complications added by the Bush tax cuts put in place in 2001.

So fundamental tax reform would seem a natural priority for the GOP. Instead, the Washington Post reports "Republican leaders are ratcheting back expectations and hoping to press forward next year with a modest tax agenda that is probably more symbolic than substantive."

Treasury Secretary Paul O'Neill, who before the election suggested a tax summit to look into simplifying the tax code, is rumored to be on the outs.

What leaders appear to be looking at is to make the Bush tax cuts permanent and then offer some additional tax credits - and tax code complexity - for telecom and other favored industries.

All of this backtracking, as Kevin Hassett, a frequent contributor to Tech Central Station and an economist at the American Enterprise Institute, told the Post, means the leaders may be "losing track of the fact that this is a once-in-a-lifetime opportunity to really force change."

Rather than doling out more favors through the current tax code, which makes Republicans look like hypocrites, the leadership needs to come up with a broader reform effort. Secretary O'Neill's idea for a summit on taxes should receive White House endorsement. Democrats - like some of those in New York's congressional delegation favoring eliminating the alternative minimum tax because it strikes New Yorkers hardest - should be approached to find out if there are more areas of common ground.

The GOP could aim for an April 15 tax day to highlight reforms that simplify a tax code that, as many of its members have long argued, undermines the confidence of Americans in the tax system and in their government.

It is vital that they do so soon. As Aldona Robbins of the Institute of Policy Innovation noted, only by first tackling the structural problems with a tax system that continues to punish savings and investment can Republicans advance another primary agenda item - reform of Social Security.

The GOP has long held itself up as the party of ideas, especially on taxes. A failure by a GOP now in control of Congress and the White House to deal with the numerous deficiencies of the tax code would indicate it has no confidence in its tax ideas, so why should voters have confidence in what Republicans say about taxes?

Editor's note: This article is the second in a three part series on the reform of political structures. To see part one, click here.

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