Libertarian Perspective
Is Tax Reform Dead?
Joe Cobb
Dec 27, 2005

At the beginning of November, the President's Advisory Panel on Federal Tax Reform reported a series of proposals for changing the income and payroll taxes. There were three or four news stories about the panel's report; not many. There was some critical commentary about the idea of changing the home mortgage interest deduction to a tax credit, which would not cover mansions. Then the story became old news and disappeared.

On November 30, The Wall Street Journal reported the results of a survey asking, "What are the chances for a major overhaul of the tax system within the next two to three years?" About 70% of the economists responding said: "A long shot."

So, those specific proposals for tax reform are dead. In spite of a worthy new book from publisher Steve Forbes, Flat Tax Revolution (2005), and some minor books advocating a national sales tax, nobody is taking seriously the idea of a major tax reform. My own modest proposal from 1982 accomplished nothing (see www.JoeCobb.com). Absent a major change in public opinion, the federal and state income tax systems are here to stay, with all their complications and injustices.

Government knows tax laws are a game. The principle of "fair" taxation was cited once as "how best to pick the feathers from the goose with the least squawking." There is no truly "fair" method of taxation. There is only a "legal" way, and politicians write the laws. Politicians depend on support from public pressure groups, and so we go deeper into tax credits and exemptions.

Too few people are willing to crusade against special interests that benefit from our current income tax system. It still brings in trillions of tax dollars, even after complex provisions buy off critics (e.g., child care credits, earned income credits, home mortgage deduction, charity deductions, employment deductions). Social Security depends on the payroll tax, and this tax may be expanded in years to come, since the retired population is going up. Medicare and other health subsidy programs will become increasingly expensive, so a new tax will probably come along to pay for those services.

The famous "ability to pay" argument is cited as "fair." Every income tax the United States has adopted, starting with the Civil War, has tax brackets with different tax rates. The income tax not only takes more money from the rich, it takes an increasing percentage of tax from them. What is "fair" about that? It is only another version of the Robin Hood principle: take from the rich, because they've got it. Like Willie Sutton said, "I rob banks because that is where the money is."

Russia and several other formerly communist governments have adopted versions of Forbes's flat tax proposal, with tax rates as low as 15 percent. Reports from those countries indicate the simplified tax systems are collecting more money more efficiently than progressive income tax systems formerly did. They claim that tax evasion and cheating have also declined.

What ever happened to the ideal of "equal justice under law," as the stone carving on the Supreme Court building in Washington, DC proclaims? If our government wanted to provide equality before the law to all of our citizens (and it should), repealing the progressive income tax would be Number One.

In the next 50 years, American government will need to collect a massively larger amount of money to pay for Social Security, Medicare, and pension bailouts, as well as national defense and other programs. Yet there is a limit to how much taxpayers will comply with. New taxes will increasingly become hidden and indirect, as in Europe. This will be another step in the direction of more arbitrary law that affects some people but not others.

For a detailed 112-page report, in PDF format, of the proposals from the president's tax reform panel, see this document from the accounting firm Ernst & Young: http://snipurl.com/kkw2. It has a good, short introduction too.