Every profession has its unofficial list-of-things-you-don?t-say, and politics is no exception. A leading entry: Never call for a tax hike.
At least, not by name. Instead, do what the Democratic presidential candidates do: Cloak your hike in the reassuring moniker ?tax reform.?
All the Democratic contenders want to repeal at least some of the tax cuts enacted since President Bush took office. Howard Dean, Dennis Kucinich and Al Sharpton (plus Richard Gephardt, before he dropped out in the wake of the Iowa caucuses) want to repeal all of the Bush tax cuts.
In other words, the reform they favor is a tax increase. Even if they were candid enough to admit it, though, their policy is misguided. There are two things we should do this year: Make the previous tax cuts permanent and begin replacing the entire tax code with a simple and fair flat tax.
The concrete results of the Bush tax cuts are all around us. Economic growth for the third quarter of last year was 8.2 percent. The stock market is soaring again. Business investment is at a 10-year high. Yet there?s a big problem with many of the cuts: They?re set to expire in a few years.
Consider the estate tax, or the death tax, as it?s often called. It?s being phased out year-by-year and will finally expire in 2010?only to return at pre-2001 levels the next year. If you think family farmers and mom-and-pop business owners have a tough time passing their businesses on to the next generation now, look ahead a few years. Should they plan to die in 2010, or set up the elaborate tax schemes required to preserve their property for their family?
Of course, all this confusion can be settled with the stroke of a pen. If Congress will agree to make the previous tax cuts permanent, everyone could begin to plan and make sensible decisions about the future. After all, lawmakers were smart enough to realize that slashing taxes would energize the economy. Certainly they?re smart enough to realize that a huge tax hike in 2010 would be a devastating mistake.
But we need to do more than just lock in the earlier cuts. We should fix the tax code to bring down taxes even further and to enact a flat tax.
Our current tax code is 17,000 pages long and includes more than 1,100 forms and publications. It?s so confusing, taxpayers are forced to spend almost $200 billion each year just to comply with it. Even IRS employees don?t understand the laws they?re supposed to enforce. Several years ago, a General Accounting Office survey found that IRS employees gave incorrect tax advice half the time.
We could save time, money and trouble with a flat tax. We could file our returns on a form the size of a postcard. And we would bring down marginal tax rates without causing revenues to fall because loopholes would be eliminated. (A faster-growing economy also would generate more tax revenue.)
That?s important, because, as my Heritage Foundation colleague Daniel Mitchell wrote recently, ?History tells us that tax revenues grow and wealthy taxpayers pay more tax when marginal tax rates are slashed. This means lower-income citizens bear a lower share of the tax burden?a consequence that should lead class-warfare politicians to support lower tax rates.? Simply put, a flat tax would be fairer.
Unfortunately, it?s probably not yet politically possible to enact a completely flat tax. Politicians have spent years attempting to use the tax code to engineer social policy, crafting deductions and credits for behavior they approve of. It?ll take some time to undo that damage. And after all, the presidential candidates in one of our political parties are actually pressing for higher, not lower, taxes.
Still, this year we should start taking steps toward a flat and fair tax system. When voters see how well it works, they?re sure to demand we make it permanent.