The Flat Tax

Why It Won't Work for America

Addicus Books, Inc.

Contents

THE INTERNAL REVENUE CODE

The Internal Revenue Code of the United States of America has been described in a number of different ways by the Flat Tax proponents: a grab bag of political favors, archaic, beyond the comprehension of mortals. In fact, the Internal Revenue Code is simply an operating manual for the collection of revenues for our multibillion-dollar economy. Without the Code, we would have no direction for the collection of revenue to fund the costs of running the U.S. economy.

FLAT TAX MYTH #1

THE PEOPLE IN CONGRESS TODAY ARE MORE COMPETENT AND POSSESS MORE INTEGRITY THAN ALL OF THEIR PREDECESSORS

Is the Code perfect in its present form? No! Can it be improved? Yes! Should it be scrapped in its entirety and started over again from scratch? Absolutely not! Unless, of course, you think the 435 representatives and the 100 senators sitting in Washington today are collectively wiser and more honest than all of their predecessors dating back to the early 1900s. We, as American citizens, cannot allow the current Congress to scrap the years of fiscal response to economic crisis contained in the current Code to promulgate a politically popular idea like the Flat Tax. Clean it up, don't kill it. We cannot afford to give this kind of power to anyone just to experiment with what might happen.

The Code has a number of leaks, but they are not beyond repair. In defense of the Code, we must acknowledge that it is a historical compilation of years and years of experience of what does and doesn't work. Sure, we have experienced failure after failure in our application of the Code. Sure, the government has given us deductions and then has taken them away, usually because they either didn't do what they were supposed to or because they were no longer viable.

Remember, in life, experience is the sum total of failures and the corrective action taken to cure those failures. The Code contains a lot of failures in its long and illustrious history and, yeah, it has become a little clumsy as of late. But if we roll up our sleeves and put competent people in charge, we can get the Code walking tall again as it has for over eighty years.

FLAT TAX MYTH #2

THE FLAT TAX WOULD REPLACE THE CURRENT 100,000 PAGES OF THE INTERNAL REVENUE CODE WITH A SIMPLE, 22-PAGE DOCUMENT

Throughout my research of the Flat Tax, I have heard many different comments about the number of pages contained in the current Internal Revenue Code, ranging from 6,000 pages to in excess of 100,000 pages. The fact of the matter is that our Code currently encompasses approximately 4,000 pages of legislation. Granted, much of this data is highly technical. But I have an operator's manual for my automobile that is in excess of 300 pages, so I am not the least bit amazed that the operator's manual for the economy of the United States of America is over 4,000 pages in length. We are dealing with a multibillion-dollar economy here.

Indeed, but the Code is difficult to understand. I agree, but I still have trouble understanding the operator's manual for my VCR. I think even the strongest of the Flat Tax proponents would agree that the U.S. economy is a little more complicated than even my VCR. It is fiction for the Flat Tax Proponents to contend that the Code can be replaced by a simple 20-or 30-page document.

To illustrate my frustration, let's take a look at the composition of the current Code. The Code is basically broken down into six separate areas:

1) Income tax

2) Estate and gift tax

3) Employment tax

4) Excise tax

5) Alcohol, tobacco, and miscellaneous taxes

6) Procedure and administration

Almost 2,400 pages of the Code (61 percent) is devoted to the explanation and definition of income tax. This encompasses areas of taxation for individuals, corporations, partnerships, non-profit, limited liability companies, etcetera. Estate and gift taxation is represented by 146 pages (4 percent); employment taxes have 168 pages (4 percent); excise taxes have 262 pages (7 percent); alcohol, tobacco, and miscellaneous taxes have 192 pages (5 percent); and procedure and administration have 748 pages (19 percent). (See Exhibit 1-1.)

So let's give the Flat Tax people their due and assume that, in fact, they can condense the income tax section of the Code into 22 pages. That still leaves 39 percent (or approximately 1,560 pages) of the Code untouched. So our simple 22-page document has already swelled to over 1,500 pages. Why don't they just tell us that?

It cannot be done. It will never work. Such an experiment could mean the end of the American Dream for all of us. I should mention at this time that approximately 2 pages of the current Code are dedicated to marginal versus Flat Tax concepts. The remainder of the Code is dedicated to the explanation of what is and is not taxable. This brings us to the next myth.

FLAT TAX MYTH #3

WITH THE PASSAGE OF A FLAT TAX, THE CODE WOULD BE DISSOLVED AND LOBBYISTS WOULD GO HOME

Nonsense! The Code wouldn't go away. It would simply be rewritten by the current Congress. The blackboard would be wiped clean, and they would start over again. The lobbyists would be more prevalent than ever, and all of the special interests would be reenergized knowing that they would now have virgin territory to attack. It would clearly be open season in Washington, and anyone who tells you differently would be pulling your leg.

Worst of all, there would be no precedent under the new law. Every tax attorney and CPA with a neat idea on how to beat the system would have nothing to stop him. All of the billions of dollars spent on tax cases in the past would be scrapped. All of the U.S. Treasury regulations and revenue rulings would be scrapped. There would be nothing available to guide us. The American economy would drift aimlessly. The U.S. Government would have to spend millions of dollars in litigation to re-establish case law and provide guidance to the American taxpayer as to what he can and cannot do under current law. The current Code is simply not going to go away, and if it does, it will spell disaster for the American economy.

The current Internal Revenue Code, with all of its faults, has taken a lot of heat. Let's try to understand just what the Code is doing for us.

FLAT TAX MYTH #4

OUR CURRENT SYSTEM LACKS INCENTIVES

The current Code is inundated with incentives for individuals and the growth of the American economy. Let's take a look at some of these incentives.

Charitable Giving A number of wonderful non-profit organizations depend on the generosity of the taxpayer for their existence. I'm not suggesting that people would stop giving simply because it's not tax deductible, but I am suggesting that fund-raising by a number of worthwhile charitable organizations would become much more difficult under a Flat Tax system.

Rental Real Estate Many middle-class Americans have devoted a great deal of time developing a portfolio of real estate in an attempt to better their financial portfolios for their families. Under the current Code, real estate investments are attractive due to their tax-favored status. They also provide a plethora of available housing for those who are not in a position to own their own home. Who would take care of the housing needs of the millions of renters in the United States if we strip the incentives for the average investor to pursue these types of investments? The government, perhaps? Where will it get the money to do this?

Home Mortgage Interest Deduction Of course, it's a sacred cow of the tax Code. It represents the additional incentive for Americans to invest in a home of their own. Take it away, and you begin to nibble away at the American Dream itself.

Disabled Access Credit An incentive for businesses to take action to upgrade the physical structure of their properties to provide easier access to millions of disabled Americans. Take it away, and who will suffer?

Child Care Credit An incentive for parents to go back to work to provide a better style of living for their families.

Elderly Credit This tax credit is available to impoverished senior citizens who are unable to meet their basic needs-food, clothing, shelter, and health care. It's available only to those who truly need it.

There are a number of other tax credits and deductions under the current Code that provide a wealth of incentives for businesses and individuals to direct their economic resources toward a particular concern such as the targeted jobs credit, foreign tax credit, low -income housing credit, and much more. All of these credits and a wealth of deductions are designed to help the American economy where help is needed. After studying the Code closely, one begins to see a method to the madness of the predecessor statesmen from Washington. It's not all bad. There are many good qualities of our instruction manual as it exists today.

FLAT TAX MYTH #5

COMPLIANCE COSTS WOULD DISAPPEAR UNDER A FLAT TAX

I disagree again. I think that if you strip the American taxpayer of his right to decide where his tax dollars go by denying him the incentives under the current Code, then compliance costs will probably be reduced, but at a cost of economic freedom. However, compliance costs will not be eliminated under a Flat Tax program.

Let's take the case of Joe Jones, who is a self-employed auto repairman and currently files a Schedule C as a sole proprietor. Let's assume that Joe has one employee. Did you know that Joe would be required to file twenty-four payroll reports each year to various federal and state agencies because of his one employee? This requirement is not only not addressed by the Flatsies, it wouldn't change one bit under a Flat Tax system. You see, I get real tired of people who only tell you half the truth. The billions of hours of compliance time that the Flatsies say would be eliminated if you strip Americans of their freedom to direct their economic future would probably be decreased, but I assure you compliance costs would not be eliminated.

In summary, I would like to show an analogy. First, I have never been able to understand how the broadcast studios are able to get that TV picture from their studios through that itty-bitty wire to my house and make a perfect picture on my television tube every time. Second, I have never been able to understand how I can talk to someone in California on my telephone in Chicago and hear what is said at the exact time it is said. How does it get through the wires so fast? Well, despite these shortcomings, I have never let them interfere with the countless hours of enjoyment and production I have gained from my use of the television and telephone.

You see, you simply don't have to understand every nook and cranny of the Internal Revenue Code to reap the plethora of opportunities it contains for middle Americans to better their financial well-being.

THE CURRENT SYSTEM POWER TO THE PEOPLE

I don't want you to think that our current system of taxation, or the Code for that matter, is perfect. It's a far cry from perfect, and there are a lot of opportunities to improve both our current system and the Code. Unfortunately, the Flat Tax is not the answer for a fairer tax system.

Before we jump on the Flat Tax bandwagon and begin criticizing the Code, I think we should understand what's good about our current Code and what it does for Americans. The current Code is filled with tax incentives and represents a true opportunity for Americans to have a democratic voice in the spending of their tax dollars with each dollar they sacrifice. If I remember my government classes correctly, the United States is not a true democracy. It is a democratic republic, whereby we run our government through representation. We elect representatives at each level of government-whether it be local, state or federal — and those representatives are supposed to carry out the wishes of the majority of their constituents. Good in theory, but I know, as you know, that it doesn't always work that way. This brings us to the next Flat Tax myth.

FLAT TAX MYTH #6

THE FLAT TAX IS THE MOST LIBERATING IDEA IN AMERICAN POLITICS TODAY

Totally false. In fact, if a Flat Tax is passed, one of the few direct votes we have in American fiscal policy today will be stripped from us and assigned directly to the power politicians in Washington. We, as individual Americans, will have virtually no voice in the direction of the American tax dollar. All of our tax dollars will be pooled in one giant trough in Washington and left to the discretion of Congress to spend it in their customary, indiscriminate manner. Elimination of lobbyists? I think not. Just look at what the Flat Tax would do. The discretion to direct all of our tax dollars (and I mean all of them) would be taken out of our hands and given to the Washington politicians. Their indiscriminate spending habits of the past would know no bounds in the future. Just think of the increased lobbying efforts that would surface.

The Flatsies would have us believe that the current Code is an incomprehensible grab bag of political favors paid for with the American tax dollar. This simply isn't the case. The Code, with all of its weaknesses, represents the last bastion of true fiscal democracy in our country today. It allows every American the right to direct a portion of his tax dollar as he sees fit — a referendum, if you will, on specific fiscal matters.

Under our current system, every taxpaying American has the ability to control fiscal spending to some extent. I won't argue the fact that the richer you are, the more control you can exert. But the fact remains, every taxpaying American today has that right if he chooses to exercise it. If the Flat Tax is passed, that final fiscal right will be gone forever, and all of the power will be transferred to our fiscally irresponsible Congress.

FLAT TAX MYTH #7

THE FLAT TAX WILL ALLOW AMERICANS TO DECIDE WHICH INVESTMENTS ARE GOOD

A Flat Tax would inhibit the investor's ability to choose the proper investments by eliminating some very important investment attributes — tax incentives. If one takes a very broad and simplistic approach to tax planning, there are basically five planning tools (or fiscal directives) that each taxpaying American has at his disposal:

1) Avoidance

2) Deferral

3) Bunching

4) Conversion

5) Shifting

These are the tax and financial planning tools available to every taxpaying American under our system today. These represent our last direct control over fiscal responsibility, and if the Flat Tax is passed, they will be taken from us and given on a silver platter to the Washington bureaucrats and their lobbying pals. Let's take a look at these tools in detail. Keep in mind that if the Flat Tax is passed, they will be gone forever.

TAX AVOIDANCE is one of the most powerful tools available today to almost every lower- or middle-class American. Now, don't confuse tax avoidance with tax evasion. Tax evasion is the illegal avoidance of tax, which is a felony. Remember Al Capone? Tax avoidance, on the other hand, is a legal means by which Americans can avoid paying taxes. It has the complete blessing of the federal government, the U.S. Treasury Department, and its enforcement agency, the Internal Revenue Service.

"Yes," you say, "but isn't tax avoidance only available to the wealthy?" No, it's in many cases more readily available to families with annual household incomes ranging from $25,000 to $200,000, which I will define later as the "working class." I offer to you as my first example IRC Sections 1034 and 121. This is the operator's manual for a multibillion-dollar economy. You simply can't label every rule by a letter in the alphabet. Remember, you don't have to totally understand electricity to turn on a light switch, the same as you don't have to understand every single section of the Code to take advantage of the tax and fiscal tools now available to you as an American. Remember, the Flatsies want to strip you of these powers that have already been bestowed upon you based on years and years of congressional debate. It's like telling Congress, since we don't understand electricity, why don't you turn our lights on and off when you think it's necessary.