I’ve covered the IRS and taxes for years, and I’ve testified before Congress about IRS and tax reform.
This country has never tried a flat tax. The federal government two centuries ago tried national sales taxes, and it’s long had a progressive tax system that was first enacted during the Civil War in 1862.
But never a flat tax.
It’s time has arrived. A flat tax would boost incentives to work, it would boost entrepreneurial activity, and it would bring capital back into the U.S. economy, flooding our country with liquidity.
Which is why more than 25 countries, including former satellite states of the now defunct Soviet Union, now have one.
But special interests will undo the flat tax once again, despite GOP presidential contenders like Rick Perry campaigning on a type of flat tax modeled after one advocated by Steve Forbes.
It’s no small irony that Russia has a flat tax, and we’re stuck with the IRS overseeing an immoral, corrupt tangled barbed wire of a U.S. tax code.
That's because of special interests who ply Congress with political donations to drill loopholes into a federal code that really is the "21st century pork barrel," because Congress acts as if they exist in the Incumbent Protection Program.
That’s largely why the tax code has grown to 73,000 pages of rules, and why it now makes Tolstoy's War and Peace read like a church pamphlet.
Besides Russia, other countries such as Estonia, Latvia, Lithuania, Kyrgyzstan, Ukraine, Slovakia, Georgia, even Romania have moved to adopt flat taxes. They have reported less tax evasion as well, and higher government revenues.
A flat tax would catch more corporations who have paid no net income taxes in recent years, including GE, Bank of America and Molson Coors.
And a flat tax would get more rich people to pay federal taxes on their income, like Warren Buffett, whose federal tax rate is low at 17% because he pays capital gains taxes and because like other rich people he shelters his income with reported moves like living off of loans against his investment portfolio, on which he can take investment deductions.
It would give people who structure their taxes to lower their bills due to high rates to come back into the system.
Want proof people change their behavior when taxes rise, even to the point of evading taxation?
Just ask our politicians. Former Ohio Democrat senator Howard Metzenbaum, who fought for higher estate taxes, decided to move to Florida before he died--Florida doesn't have an income or estate tax. Ohio has some of the highest state income tax rates and estate taxes in the country.
Sen. John Kerry (D-Mass.) relocated his $7 million yacht in neighboring Rhode Island from his home state, lowering his state sales and excise tax bill by an estimated $500,000. And former House Ways and Means chairman Charles Rangel (D-NY) used various moves to evade federal taxes, too.
Amidst steadily rising taxes, politicians evaded and defrauded. Rep. Walter Tucker (D-Calif.) resigned from the House of Representatives in the mid-'90s due to charges of income tax fraud and bribery committed while he was mayor of Compton, Calif.
Rep. James Traficant was convicted of tax evasion, along with bribery and racketeering charges, and was sentenced to serve time. The late Sen. Ted Stevens (R-AK) was found guilty of tax evasion, among other things, in 2008; Rep. Randy Cunningham (R-Calif.) pleaded guilty to income tax evasion, among other charges, in 2005. Former Treasury Secretary Catalina Villalpando under President George H. W. Bush also pleaded guilty to tax evasion in the early '90s.
This occurred even though the IRS for years had an office on Capitol Hill to help Congressmen with their own personal taxes--meaning, to help them figure out the tax law they themselves wrote.
Because of its complexity, the federal tax code even trips up the IRS itself as its workers give out wrong answers to taxpayers. Which is why the agency is now called America’s museum of mass confusion by the Heritage Foundation.
Its complexity has also tripped up the man charged with overseeing it, Treasury Secretary Tim Geithner.
It wasn’t always like this. After the war of 1812, the U.S. effectively had a national sales tax on consumer items like jewelry, watches, gold, silverware, you name it. Five years later, Congress abolished this tax — too much abuse, too much avoidance — and smacked imports with tariffs to pay for the government.
More than four decades later, the U.S. launched a progressive code to help pay for the Civil War. The federal government taxed individuals making $600 to $10,000 per year at just 3%, with higher rates for higher incomes. The U.S. later larded on sales and excise taxes as well as an estate tax.
It would take another big war, World War II, for a full-blown payroll tax withholding system to be installed to help the U.S. government collect federal income taxes.
In 1943 economist Milton Friedman, who at the time worked in the tax research division of the Treasury Dept., helped develop this withholding system to take care of collecting Social Security payroll taxes, as Social Security was just enacted less than a decade earlier in 1935 (Friedman later regretted helping craft the withholding system).
Soon the U.S. tax system really turned into a pile of tangled fishing tackle. Because Congress had the attitude that all income and wealth belong to the state, not you for creating it, an attitude it seems many in the federal government still hold to this day.
During the 1930s, the U.S. tinkered with 50 different federal taxes on individuals and corporations. It did so with a stream of bills. It enacted the 1932 Revenue Act, the 1934 Revenue Act, the Revenue Act of 1935, the Revenue Act of 1936, a Revenue Act in 1938, and two Revenue Acts of 1940. By then the top rate topped out at 79%.
And similar to President Barack Obama’s new Buffett tax idea, the U.S. even adopted the “Soak the Rich Act” in 1935, which raised taxes on incomes above $50,000, as well as companies, gifts and estates. It also installed a top bracket that went after just one taxpayer with an income of more than $5 million, John D. Rockefeller.
Meanwhile, the U.S. unemployment rate rose sharply. In 1929 the U.S. started out with unemployment at just over 3%. Unemployment soared to 25.2 % in 1933, and by 1940 it was still stuck at 14.6%.
Economic historian Thomas Sowell has said of that time: "Although the big stock-market crash occurred in October 1929, unemployment never reached double digits in any of the 12 months after that crash. Unemployment peaked at 9%, two months after the stock market crashed--and then began drifting generally downward over the next six months, falling to 6.3% by June 1930."
But what happened to cause unemployment to soar? Government intervention and tax hikes, Sowell says.
Media pundits to this day ignore the fact that U.S. taxes are collected to pay the financing costs of the government’s gargantuan deficit spending, which relies on lots of borrowing in the government bond markets. They also ignore the government’s wasteful spending. The U.S. federal deficit is now more than $14 trillion.
Because fiscally responsible politicians are an endangered species, there has been a worldwide bubble in government, which is really the problem, despite what you hear from the Occupy the Parthenon movement in Greece, or the Occupy Wall Street, et. al., movements in the U.S.
But what do we know now about tax revenues from tax hikes, given the soak the wealthy movement the President is now campaigning on, similar to FDR’s “economic royalists” rhetoric?
The Congressional Budget Office estimates the Buffett tax would raise just $453 billion dollars over ten years, or $45 billion a year. That would pay for just about 13 days of government spending for the year (based on 365 days in the year, not the 251 business days). Tax 100% of those at $250,000 or more, you’d pay for six months of government spending.
About 80% of all small businesses file federal taxes as individuals. The President wants to raise their taxes through hikes in federal rates, as well as even more taxes in the health reform act. That would worsen joblessness.
And even if you enact the Buffett Tax, the U.S. Congress has yet to enact a lockbox for those revenues to pay for things like stimulus spending to create jobs.
After candidate Bill Clinton vowed a middle-class tax cut during the 1992 campaign, that quickly turned into just a teeny child care credit, as Clinton did raise taxes on the middle class.
However, Clinton’s 1993 tax hikes only pulled in a third of the tax revenue that the Congressional Budget Office had forecasted. In fact, Clinton’s cuts in the death tax and the capital gains tax brought in more revenue than Clinton’s hike on the upper bracket.
A recent analysis shows that the wealthiest 400 paid almost the same amount in taxes in 1994 as they paid in 1992, even though Clinton raised their taxes. Again, the rich can shelter their income, which the flat tax would catch.
Moreover, an analysis of IRS data shows that by 2000, just 123 of these 400 paid a quarter or more in taxes, down from 30% before Clinton's tax hikes went into effect, IRS data show.
And the government collected more in capital gains tax revenue from the wealthy each time those taxes were cut, because the rich were more likely to not sit on those assets and cash them out at the lower tax rate.
Indeed, realized capital gains climbed 28% after the rate cut in 1997, and 21% after the 2003 cut, according to the IRS, reports Investor’s Business Daily.
Elizabeth MacDonald joined FOX Business Network (FBN) as stocks editor in September 2007.
Follow Elizabeth MacDonald on Twitter @LizMacDonaldFOX.