Gop Generals, Train Your Guns On The Income Tax

The energy in the new House of Representatives is a marvelous thing to behold. The question is whether it will be marshaled for fundamental change or dissipated in piecemeal battles.

The great generals of history who operated on political and military fronts focused on strategic objectives and were not diverted by tactical aims. They were audacious and out-thought the enemy.

Speaker Newt Gingrich and his GOP colleagues in the House have this capability, but they must first understand that their Contract With America is nowhere near as audacious as the liberal press would have readers believe. Indeed, its achievement would represent a string of small victories without a strategic objective. Yes, it would be a good thing to cut the capital-gains-tax rate or enact a $500 income-tax credit per child. However, these maneuvers would use up momentum while leaving the current structure of taxation intact.

A Napoleon or Wellington would realize that the same energy could be applied to revolutionizing the tax system. Why take casualties fighting over dynamic vs. static forecasts of capital-gains revenues or finding the spending cuts to offset the child tax credit when the alternative is to replace the current income-tax system--which discriminates against success, families, marriage, saving, and investment--with a flat-rate tax, a "consumed-income tax," or a federal sales tax?

HEALTHIER EGGS. These alternatives are vastly superior to the tax goals set out in the contract. Senators Sam Nunn (D-Ga.) and Pete V. Domenici (R-N.M.) have revived the consumed-income tax that was first proposed by Treasury Secretary William E. Simon in January, 1977. Under this system, all income that is saved is exempt from taxation, thus allowing people to rapidly acquire substantial nest eggs.

Representative Richard K. Armey (R-Tex.), the Majority Leader in the House, has carefully crafted a 17% flat-rate income tax that would refurbish the economic-incentive system. It is obvious that encouraging success is superior to thwarting it and having to fill in the gap with more entitlements that cannot be financed.

Perhaps the best idea comes from Bill Archer (R-Tex.), the new chairman of the House Ways & Means Committee. Archer wants to abolish income taxation altogether and replace it with a federal sales tax on personal-consumption expenditures. A 14% sales tax on such outlays would replace the current individual and corporate income-tax revenues. Archer's idea could be expanded to cover the payroll tax as well. Or, even better, the payroll tax could be eliminated by privatizing Social Security, thus adding to taxpayers' personal wealth.

TANGLED WEB. It is a mistake for Republicans to focus on minor modifications when it is easier to abolish the current tax system than improve it. Under current budgetary rules, tax changes require expenditure changes. Steps cannot be taken to make the tax system fairer to families with children or improve economic incentives unless expenditures are cut commensurately. But the spending cuts pit organized interest groups against unorganized families with children. These tax and spending changes could be pushed through, but the effort required would be enormous for a minor improvement.

The current U.S. tax system is the worst imaginable. Even its supporters concede that its purpose is to appease envy by penalizing success, but in fact the tax system worsens income inequality. Progressive tax rates and multiple taxation of saving, together with the payroll tax, make it all but impossible for any but the most able, determined, and lucky to break through to affluence.

The left will scream about any alternative to the progressive income tax because it believes that the purpose of taxation is to achieve equality by leveling differences in success. To the left's way of thinking, only the government should have any money, and everyone should be equally dependent on Washington. The left, however, was smashed in the last election, an indication that voters are fed up with the handicapping imposed by the current tax system.

There is no more hated institution in American life than the Internal Revenue Service. Once people realize that under Ways & Means Chairman Archer's system, they would no longer have to report their income or have any relationship with the IRS, support for his proposal will be overwhelming. To free Americans from the fear of frame-ups and arbitrary rulings; seizures of property; penalties; and interest would be the greatest act of emancipation since 1865.

Before it's here, it's on the Bloomberg Terminal.