The article caught my attention because Forbes pays attention to something that usually goes unmentioned in most discussions about our tax system: the politics involved.
Having been a tax professional in a previous career, I am often asked questions such as, “Why do we have to pay a third party to electronically file our taxes? Shouldn’t the IRS do this for free?,” and “Why is it so hard to figure out what tax exemptions are available for having paid college tuition?”
The simple answer: politics. The last major bill that altered our tax system was the Tax Reform Act of 1986. (It’s been amended more than 14,000 times since then). The exploits of the lobbyists and the various politicians involved were nicely exposed in a book called Showdown at Gucci Gulch.
For example, the main reason you can’t electronically file with the IRS for free (people meeting certain criteria actually can, but the total number of targeted taxpayers is relatively small) is that several groups lobbied very hard against it, particularly the CPAs and tax preparation firms. They were successful in getting an agreement written into the law that the IRS would never provide this service for free to the general public, despite the fact that it would be far cheaper for the IRS to do this than to process paper returns. It was apparently a tradeoff to get funding for the expansion of electronic filing beyond a being a pilot program. The result is the subsidizing of an industry that needn’t exist.
Forbes notes that “One-sixth of the private-sector employees in Washington are employed by the lobbying industry. Half their efforts are directed at wangling changes in the tax code.” That is why our tax system has become “a beast whose complexity, confusion and outright unfairness have corrupted our economy and society.”
Hitting on health care costs, Forbes ominously adds that “our health-care system, with its runaway costs, is, in fact, the ultimate product of the tax-code distortion in our economy.”
Then Forbes touts the benefits of his flat tax system, predicting an unprecedented economic and innovation boom. He discusses the basic economics of his proposal:
What so many "experts" can't grasp is that taxes are not only a means of raising revenue for governments but also a price and a burden. The tax you pay on income is the price you pay for working; the tax on profits is the price you pay for being successful, and the levy on capital gains is the price you pay for taking risks that work out. When you lower the price of good things, such as productive work, success and risk taking, you get more of them. The flat tax does that dramatically.Forbes slams the idea of a national sales tax, noting that it would substantially raise prices on goods and services. “Imagine a couple buying a new house costing, say, $200,000, coughing up an extra $60,000 in sales taxes.” I am opposed to a national sales tax because it is one of the most regressive forms of taxation and it would spawn two whole new industries: one on the collection side and one on the black market side, as has been demonstrated in other countries.
Forbes is touting his tax reform proposal in his recently published book.
The biggest obstacle in achieving the kind of tax reform Forbes suggests is the political system discussed above. These people are not going to lie down and see their current stream of captive customers evaporate. It would require serious and forceful leadership to see this through. Indeed, Forbes calls for President Bush to stand up and provide that leadership.
Will President Bush be the kind of forceful leader on this issue that Forbes wants? If his leadership on the Social Security issue is any measure, I doubt it.