The IRS vs. the People: Why Lawmakers Must Be Bold

FIXING THE TAX CODE will not be easy. The mess we have today is a testament to the influence of special-interest politics, and a fundamental tax reform will have to overcome powerful groups that want to preserve the status quo. Some battles are worth fighting, however, even when the odds are steep.

Our tax code is unfair. It is riddled with social engineering. The system is corrupt, and it undermines opportunity for those most in need. The American people understand that the tax code is irretrievably broken, and they will be receptive to bold and visionary leadership.

The time is right for the flat tax.

A question often asked, however, is whether implementing a flat tax requires too much change at one time. Yes, it does create the ideal system, skeptics admit, but why not try to appease the special interests by fixing the tax code’s myriad problems in a step-by-step fashion? Reduce tax rates one year, repeal the death tax the following year, end double taxation of dividends the year after that, and keep the process going until everything wrong with the current system is fixed and a flat tax is achieved.

This incremental strategy is appealing, but it may not be realistic. For one thing, the one-step-at-a-time approach is what produced the current tax code. Yes, positive changes are implemented every so often, but it is just as likely that politicians in any given year will move us even further in the wrong direction. Even when lawmakers move in the right direction, they may do so in a bizarre way.

Consider the 1997 tax cut. This legislation had many positive features, including the fact that it was the first tax reduction in 16 years. Yet, because Congress and the White House engaged in so much horse-trading, they wound up making everything more complex. The bill created more than 250 new sections in the tax code and amended more than 800 others.

For this reason, lawmakers should reject the piecemeal approach and adopt the flat tax. It is true that some special- interest groups will oppose a flat tax. It is also true that some politicians will instinctively resist reform because it will take away so much of their power and make it harder for them to raise campaign contributions. But the flat tax also offers certain political advantages:

  • Coalition support. The flat tax solves all of the tax code’s problems at once. People who are angry about the capital gains tax can join forces with others who are upset about the code’s complexity. Taxpayers fed up with high rates can find common ground with business owners frustrated with depreciation and the alternative minimum tax. Farmers angry about the death tax can work with savers upset about double taxation. A serious campaign to implement the flat tax could count on a wide-ranging base of support. In other words, when it comes to winning, the whole is greater than the sum of its parts.
  • Political popularity. In the real world, polls matter. The flat tax is not a guaranteed winner, but it consistently generates support from 50 percent to 65 percent of voters. This popularity is driven largely by the public’s desire to have a simple and fair tax system that gets the IRS out of their lives. Ironically, many of the component parts of the flat tax, such as capital gains tax repeal and the abolition of loopholes, are not very popular, especially if considered as free-standing pieces of legislation. Once again, the whole is greater than the sum of its parts.
  • Freedom and civil liberties. Supporters of the flat tax can argue that sweeping reform means substantially expanding civil liberties and creating a tax code based on widely shared moral values. This means that a flat tax will attract voters who may not care about the overall tax burden and may not understand how the current system undermines prosperity. They may want all taxpayers to be treated equally, or they may want to defang the IRS, or they may want simplicity and transparency. Whatever their goal, these citizens will add their voices to those who support tax reform for more traditional (and often self-interested) reasons.

Trying to fix this monstrosity one piece at a time is probably an impossible task. For every step forward, there will be two steps backward. The only hope for victory is to repeal the entire code and start over. Have lawmakers sit down with a blank piece of paper and draw up a tax code that fulfills the promise of equality before the law. Let them imagine the kind of world they want for their children and grandchildren.

Appealing to the best in everyone is the right way to achieve true tax reform. A flat tax is possible. All it takes is a commitment to do the right thing.

Mr. Mitchell is the McKenna Senior Fellow in Economic Policy at The Heritage Foundation. This piece is excerpted from “The IRS vs. The People: Time for Real Tax Reform.”