`I Want To Tear The Income Tax Out By Its Roots'

Ways & Means Committee Chairman Bill Archer (R-Tex.) is the House GOP's point man on taxes. With his panel scheduled to start drafting its version of a 1995 revenue bill in a few weeks, he took time out to talk to BUSINESS WEEK Senior Correspondent Howard Gleckman about prospects for the tax cuts proposed in the Contract With America and his hopes for broad-based tax reform.

Q: Will the Ways & Means

Committee change the tax provisions of the Contract With America?

A: If we can improve on the specific provisions, certainly we don't feel that we're denied the right to do that.

Q: You support indexing capital gains for inflation. But critics say that's too complex. Is there a simpler way to do it?

A: There really is not. But in this day of computerization, I don't think the complexity will be that great.

Q: Would you increase the capital-gains rate cut while eliminating indexing?

A: I don't think so. Indexing is the most important long-term reform that we can put into the code. The only way we can increase real family wages is to increase productivity. We can only increase productivity if we add additional savings that are invested to buy tools. I don't want to dismiss the fact that you've got to upgrade the skills of workers. But if you don't have the tools, you reach a blind alley. If we are going to have greater productivity, we must have more savings and more capital investment.

If we continue to [discourage] savings, we force ourselves into dependency on foreign savings or a lower standard of living. If we really wanted to be competitive, we'd probably reduce the capital-gains tax to near zero.

Q: It seems even that is a relatively small change compared to broad tax reform.

A: Absolutely. We have reached the point where we cannot fix the current income tax and should look at replacing it with a broad-based consumption tax. We've ended up with a tax which is heavy in the cost of compliance, enforcement, and litigation. We have a code which has effectively taken away most of the incentives for savings and [boosted] the underground economy. It does not permit us to remove the cost of government from the price of our products sold overseas nor does it permit us to charge a proportional share of the cost of our government to foreign products that come into this country.

I want to tear the income tax out by its roots. I want to get the income tax out of our individual lives completely.

Q: Are the tax changes in the Contract With America really only a Band-Aid?

A: They are a limited incremental reform.

Q: Can this Congress pass tax reform?

A: That's a hope I would share. But before it can happen, President Clinton has to be willing to sign it, and I do not sense he will do that. I suspect the liberal Democrats in the Senate will throw up major roadblocks.

It could pass the House, if we can develop a consensus. We've still got to get into the debate between a flat tax and a broad-based consumption tax before we can see the Republican Party behind one proposal. I look forward to seeing full-blown debate sometime this year.

Q: Why do you prefer a broad-based tax on consumption instead of a flat tax?

A: I was for a flat tax in '86. But [President Reagan] elected to continue the very arcane income-tax system. I jumped ship on them and opposed the '86 [Tax Reform] Act. It was one of the best things I ever did.

I've gone beyond [the flat tax] now. At that time, we [did not recognize] that our future was going to be [tied] to competition in a global commercial marketplace. If all we could get was a flat tax, certainly that would be an improvement. But the flat tax does not eliminate the Internal Revenue Service from our lives. It still taxes savings at between 17% and 20%. It does nothing to get at the underground economy, nothing for the way we charge for products at the border. More importantly, it leaves the roots of the income tax in the ground.

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