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By Robert J. Samuelson
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WE AMERICANS ARE SUCKERS FOR QUICK FIXES. IF the dog barks, kick it; if the team loses, fire the coach. Small wonder, then, that the latest horror stories about the Internal Revenue Service have revived talk of radical tax reform. If the IRS can't be trusted, abolish it. End the income tax. Congressional Republicans scripted the IRS hearings with just this idea in mind. Public outrage, once stirred, will create a climate to replace the income tax with a ""flat'' tax or national sales tax. That would be good policy--and good politics. The advantages of a simpler, fairer system would bolster Republican fortunes for years.
Dream on. It almost certainly won't happen. The practical and political problems of jettisoning the income tax are so daunting that, once they become understood, the appeal of alternatives may fade. Radical reform would take a sledgehammer to the tax code's complexity; but its fatal weakness is that much of the complexity flows from popular provisions--the mortgage interest and charitable deductions, for example. The only way to abolish the IRS is to rename it. Someone will always have to collect the taxes.
All advanced societies have high taxes, because people want high public services. High tax rates inspire complexity, because voters and politicians use taxes to reward or punish various groups and behaviors. Our system rewards homeowners and the elderly, among others; it punishes smokers and the wealthy, among others. The dilemma is how to prevent complexity from becoming self-defeating.
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A tax system that is too complex weakens voluntary compliance and risks crushing economic burdens. People can't easily calculate what they owe or--believing that the system is unfair or unenforceable--decide that they're free to cheat. Already, compliance costs--the time spent by taxpayers, accountants and lawyers--are high. Economist Joel Slemrod of the University of Michigan puts them at about $75 billion annually, or about 10 percent of taxes raised. And costs will increase. The Tax Relief Act of 1997, just passed by Congress and signed by President Clinton, gushes complexity. It creates new tax breaks (a family tax credit, write-offs for college tuition and some new tax-favored savings accounts), and it sets multiple new rates for capital gains (profits on stocks and other assets). Popular irritation is bound to rise, as taxpayers grapple with the heightened complexity.
Tax reform promises to erase the costs and frustrations. The best-known plan is the ""flat tax'' championed by House Majority Leader Richard Armey. It would sweep away almost all deductions and credits and impose only one rate: 17 percent. Individuals would get hefty tax-free allowances: $11,600 for a single person, $23,200 for a married couple and $5,300 for each dependent child. The national-sales-tax plan--devised by Republican Congressmen W. J. Tauzin of Louisiana and Dan Schaefer of Colorado--would replace the income tax with a 15 percent retail tax. Finally, Democratic House Minority Leader Richard Gephardt would create five tax brackets with rates of 10, 20, 26, 32 and 34 percent. (The current rates are 15, 28, 31, 36 and 39.6 percent.) Lower rates would result from taxing much income that is now tax-free. The biggest additions would be employer payments for health insurance and pensions.
All the reform proposals offend big constituencies. Start with nonprofit groups--ranging from the Girl Scouts to the Sierra Club. A study done for the Independent Sector, an umbrella group of nonprofits, estimates that ending the charitable-contribution deduction would cut individual giving by 30 percent. Churches (recipients of 46 percent of donations), universities (13 percent) and hospitals (9 percent) would all defend the charitable deduction.
Switch next to the nation's 65 million homeowners. Their real-estate values are propped up by the deductions for mortgage interest and local property taxes. These make houses more affordable; therefore home prices are higher. Remove the deductions, and home prices might fall. (Both deductions would vanish under the flat tax and the national sales tax; Gephardt would keep the deduction for interest but not for local property taxes.) A study done for the National Association of Realtors estimated that home prices could easily drop 15 percent if those breaks were eliminated.
There are rejoinders to many of these criticisms. Flat-tax advocates claim that their plan would lower interest rates. If true, this would raise home prices by making housing more affordable. Faster economic and income growth is another purported benefit. People could then boost charitable donations. But none of these rejoinders is provable. People and interest groups would weigh identifiable losses against speculative gains. It's not a hard call. And the flat tax and retail sales tax also face the legitimate criticism that they favor the wealthy over the poor.
There is, in short, no quick fix for the IRS. At best, the path to basic tax reform would be long and hard. The pity is that the Congress and the White House started down this road, with modest success, in the Tax Reform Act of 1986. After that law, the income tax had only two basic rates (15 and 28 percent); Congress had broadened the tax base by abandoning some deductions. Unfortunately, most gains were squandered in the 1990s. President Clinton did most of the damage, persuading Congress (then Democratic) to raise top rates to almost 40 percent in 1993.
The result is that the country is now losing the struggle to contain tax complexity within tolerable bounds. High rates create pressures for tax relief through new tax breaks. All this hurts the IRS's performance. An agency that has too much to do won't do anything well. The more the IRS has to rewrite computer programs and explain the tax code to baffled taxpayers, the less attention will be devoted to making audits fair and effective. And the more complex the tax code, the more mistakes taxpayers will make. If sweeping reform is impractical--as it seems--undoing the damage of the latest bill would prevent matters from getting worse. Even that, however, seems improbable.
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