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"Complicated Tax Cuts Playing Favorites between Rich and Poor"

Why not implement REAL Tax Reform?

By Joseph G. Lolli

© Joseph G. Lolli - 2002

 Every year, American taxpayers face the mid-April ritual of filing their federal income tax returns with dread. The year 2002 will be no different. Is any REAL tax relief on the way?

 Last year, President Bush pushed hard for $1.6 trillion in tax relief over the next 10 years. Congress approved only a $1.35 trillion reduction. The Bush plan lowers marginal rates would eventually ease the marriage penalty and temporarily phases out the estate taxes (it reappears in full in 2011). But will all its "cuts, the Bush plan remains a very complicated system and will not simplify the tax code at all.

 In 1981, Professor Robert E. Hall and Dr. Alvin Rabushka proposed the concept of a flat tax for the United States in the publication of their book "The Flat Tax" (Hoover Press). The forms in their book were so simple that tax returns could be filed on a postcard. The idea was popular in the early 1980s and again in the mid-1990s. Popular with everyone except the special interests and opponents of low tax rates. They succeeded in blocking its adoption, and American taxpayers all suffered.

 Although the Flat Tax idea may be near death here, the idea has met success in some unlikely quarters. On January 1, 1994, Estonia, a post-communist transition economy, implemented a 26 percent flat tax. Latvia followed with a 25 percent flat tax a year later. Croatia followed with a tax reform that embodies the core features of the flat tax. All of them have worked well with practice.

 The most dramatic story took place in Russia. With the advent of capitalism under Boris Yelsin, Vice President Al Gore funneled billions of American tax-dollars to the Russian president on the condition that he would adopt policies that were favored by the American administration. Part of those policies was the implementation of the liberals ideal tax system. A system of graduated taxes that would charge almost no taxes to low income earners but would require upwards of 80% tax on income on high wage earners.

 That's all well and fine for countries like the United States where the rule of law mandates citizens to pay their taxes. But in Russia where corruption was the norm, it was far simpler for a high-income earner to simply bribe the tax collector with 20% or 25% of the tax and the state wound up with nothing. As a result, the "Yelsin/Gore" administration created a society of criminals, where there was no respect for the rule of law. Crime was rampant since even government officials encouraged criminal activity, versus lawfully paying taxes to the state. The result was chaos and anarchy.

 In January 2000, the new Russian president, Vladimir Putin, inherited a bankrupt government and a nation that was in collapse. One of the first things President Putin did was to request that Steve Forbes come to Moscow and advise him on how to salvage his government. Mr. Forbes asked Dr. Alvin Rabushka to accompany him on the trip. The result of that visit was President Putin pushing through a total overhaul of the Russian tax code. Putin and the Politburo implemented a 13 percent across the board flat tax beginning January 1, 2001.

 In remarks at the Russian Ministry of Finance on April 16, 2001, Putin reported that income tax revenues for the first quarter of 2001 ran 62 percent above the entire previous year's revenue collection and far ahead of earlier projections, due to the new 13 percent flat tax. President Putin has repeatedly pointed to the 13 percent flat tax as one of the key policy achievements of his new administration.

 The result is now it's cheaper for wealthy individuals to simply pay their taxes than to risk bribing the tax collector. People are more focused on income and revenue production than they are on trying to shelter their income or hide their assets. More jobs are being created, more business, more prosperity and a more stable government able to provide services.

 As a result of the Russian paradigm, three Polish political parties plan to introduce a flat tax in the Polish legislature in 2002. Last year, the Chinese Taxpayer Press has inquired about translation rights for "The Flat Tax" (Hoover Press).

 Of course, the American news media said not a word about these events. Only the British Economist and the Financial Times of Britain documented the successes of the 'Flat Tax' concept.

 It is important to reduce tax burdens and marginal tax rates. But the Bush plan, even after its full enactment, will still leave the incredibly complicated nightmare of the federal income tax code largely in place, burdened with deductions, exemptions, credits, the alternative minimum tax, and other absurdities that require professional tax advice.

 If we are really serious about "stimulating the economy" and maintaining revenue levels for our government, lets hope that at least someone in Congress or the Whitehouse can devote some attention to REAL tax reform and emulate Putin's bold vision of a low simple flat tax.

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