MY POINT OF VIEW


Tax Reform? Dream On

There are a lot of tasks I'd rather do myself than pay someone to do for me, but preparing my tax return isn't one of them. I'm among the estimated 60% of taxpayers who use a professional. It's not that the return my wife and I file is complex -- no exotic tax shelters, rental property or day trading. But given that the IRS's own hotline provides incorrect information about half the time, I'll leave the task to my savvy CPA.

Like millions of Americans, I yearn for genuine tax simplification, and I'm not fussy about what form it takes. Any of the radical reform plans would be better than our present Rube Goldberg contraption -- some 60,000 pages of arcane code, regulations and IRS rulings that distort our economy, penalize saving and unfairly reward special interests.

1040 on a postcard

How about one low-rate tax on all income, with absolutely no deductions? No write-offs for mortgage interest, charitable donations, state and local taxes, or anything else. Yes, I could live with a flat tax, and we really could file our return on a postcard.

Or how about a national sales tax, levied only on consumption, rather than on earnings and investment income? I like this concept even better. At some rate to be determined (probably pretty hefty), it could replace all federal taxes on income, asset gains and estates. It could even replace the regressive payroll taxes that fund social security and medicare -- taxes that, for most low- and middle-income earners, exceed their income-tax bill.

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A federal retail sales tax would be easier to administer than a value-added tax, which is levied at all stages in the production-and-distribution chain, because a sales tax could be collected by the states and forwarded to Washington. Poor people would get all their sales taxes rebated. Big-spending rich people would pay a bundle in sales tax, and super-savers at all income levels would pay relatively little. America's woefully low savings rate would soar, lessening U.S. dependence on foreign capital. (For more about a national sales tax, see www.fairtax.org.)

Supporters of tax simplification assure us that their plans would be "revenue neutral" -- that is, they'd generate the same amount of money as the present tax code.

But I wouldn't mind paying even a somewhat higher federal tax bill than I do now in exchange for true simplification. I would feel better knowing that, with the demise of countless tax breaks for favored individuals and industries, everyone would be paying his or her fair share.

Realistically, what are the odds that these plans will be enacted? Sadly, slim to none.

There were hopes that President Bush's bipartisan Advisory Panel on Federal Tax Reform might endorse a truly bold plan. Instead, the panel proposed reducing the number of tax brackets, lowering the top marginal rate to 30% or 33% from 35%, ceasing the taxation of dividends, and trimming the top rate on capital gains (but only on stocks) from 15% to about 8%. Abolition of the hated alternative minimum tax would be funded by trimming the mortgage-interest deduction, limiting the exclusion for employer-paid health insurance, and ending the deduction for state and local taxes.

It's not a bad plan, but Congress probably won't go along with even these modest reforms, given the powerful lobbies that defend every current deduction.

Don't hold your breath

True tax simplification will remain an elusive dream. Congress will say it's too risky to gamble on a flat tax or national sales tax, given the unknown effects they might have on an economy that is addicted to the countless stimuli in the present tax code.

Let's face it: When it comes to true income-tax reform, Congress still prefers the devil it knows to an unpredictable devil it dares not imagine.

Columnist Knight Kiplinger is editor in chief of Kiplinger's Personal Finance and of The Kiplinger Letter and Kiplinger.com.


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