Taxing America's patience

from Washington

Michael Dean is used to big numbers. As a Milwaukee-based attorney specializing in business, real estate, and Constitutional law, he routinely advises clients on deals in which millions of dollars are at stake. Yet there's one number that strikes fear in his heart: 1040. Three years ago, Mr. Dean decided he'd rather pay someone else to prepare his annual Form 1040 for the IRS than bother doing it himself. He found himself spending "an inordinate amount of time" to file his taxes each year, until he finally decided that "the regulations have become so arcane that it is more productive to send it to a professional."

But can taxes really be tougher or more arcane than torts? "Yes, by far," he insists. "At least there's a rational basis for torts." Besides, in practicing law he may have to argue before the state supreme court, but that's nothing compared with trying to prove one's innocence to the IRS. "I think the attitude of the IRS is pretty well summed up by a quote attributed to Richelieu that goes something like this: 'Give me 15 words written by the most innocent of men, and I will find something with which to hang him.'"

It's that combination of hard-to-understand requirements and hard-to-appease government agents that drives so many bright and capable Americans to pay tax preparers hundreds of dollars each year to tell them how many more thousands of dollars they owe to Uncle Sam. And no wonder. When the income tax debuted in 1913, the tax code ran just 11,400 words, simple enough for almost anyone to understand. But at 555 million words, today's tax code has become so complex that taxpayers spend a cumulative 5.4 billion hours a year filling out their Form 1040s so as to keep as much of their hard-earned money as they can without breaking the law.

Last year, David Emmith of Manassas, Va., was one of those frustrated filers--so frustrated, in fact, that he decided to rebel. Surfing the net at tax time, he stumbled across the website for a group called Citizens for an Alternative Tax System, with a national headquarters right in his neighborhood. Today Mr. Emmith is the chapter director for CATS in northern Virginia, just across the Potomac from enemy headquarters in Washington, D.C.

Anyone meeting Mr. Emmith knows at once who the enemy is. His Rush Limbaugh tie, normally a sure eye-catcher, is overshadowed by the large lapel sticker on his left breast. The black letters IRS are surrounded by a red circle and bisected with a heavy red slash. Likewise, the back window of his conversion van has been turned into a rolling billboard plastered with computer-generated signs. One quotes Einstein as saying that the most complicated thing in the world is figuring taxes, while another claims that there are more federal agents investigating tax cheats than there are pursuing terrorists.

Mr. Emmith and his organization have a simple solution for Einstein and others confused by the current income tax system: Do away with it altogether. By implementing a national sales tax, they say, Uncle Sam could collect all the revenues he needs without sending out his IRS heavies to comb through the private papers of citizens, looking for cheaters. And because the 15-17 percent tax would be collected every time the cash register rings, April ulcers and strained marriages would be a thing of the past.

The ordeal of filing taxes has become such a rite of spring over the past 80 years that the thought of doing away with it may seem to border on anarchy. Mr. Emmith wants people to know that lapel stickers and car signs notwithstanding, his members are no anarchists. "This is not a radical outfit that suggests that we not pay taxes to the government," he stresses. "All we are suggesting is that the government have a different manner in collecting its revenues. The amount that we pay, that's a whole separate issue. Our focus is to change the way that the government collects its taxes--make it much fairer and simpler."

The idea of a national sales tax to replace the income tax is respectable enough to have attracted some heavyweight congressional supporters. Rep. Bill Archer (R-Texas), chairman of the tax-writing House Ways and Means Committee, appears on a 30-minute infomercial produced by CATS, lending his support to the proposal. Two less-known representatives, Dan Schaefer (R-Colo.) and Billy Tauzin (R-La.), plan to make the IRS's big day by introducing their national sales tax bill on April 15.

Even if Schaefer-Tauzin doesn't pass (it was killed in committee last year), members of the mammoth IRS bureaucracy will be looking over their shoulders in the coming months. Frustration with the current system clearly is growing, even if there is no consensus on how best to fix it. One problem with the labyrinthine logic of the tax code is the loopholes that it opens up to special-interest groups. Anyone with enough clout in Washington can have special exemptions written into the law to protect a favored industry. Clout in Washington usually translates into lobbyists, 67,000 of whom now work in the nation's capital. So lucrative is the lobbying sector in Washington that, if lobbyists were to form a nation, the $8.4 billion in revenues they generate each year would place them ahead of the entire economies of 57 other countries.

Some members of Congress, including Majority Leader Dick Armey, believe that the best way to transform Washington's political culture and clip the wings of special-interest groups is to simplify radically the income tax code. On March 12, Mr. Armey introduced a flat-tax bill that would tax all Americans--both individual and corporate--at a rate of 17 percent. The only income not subject to taxation would be the personal exemption that all Americans would receive--about $33,800 for the typical family of four.

"Our current income tax system is broken," Mr. Armey said in introducing his bill. "It is complex and unfair, and robs working families of the benefits of a growing and prosperous economy. It punishes marriage, rewards special interests, and too often intimidates honest taxpayers."

Mr. Armey pointed out that the IRS currently produces 480 different tax forms and another 280 forms to explain the 480. That makes for some 8 billion pages of tax forms and instructions mailed by the IRS each year, which, if laid end-to-end, would circle the earth 28 times. Yet "even with all these forms and instructions," Mr. Armey says, "few Americans fully understand the code, including all too often the men and women at the IRS whose job it is to answer questions, review filings, and assess fines."

Mr. Armey's enthusiasm for the flat tax has put him at odds with his usual ally, tax writer Congressman Archer. The fact that two of the staunchest economic conservatives in Congress are on opposite sides of the tax-reform debate may not bode well for harried taxpayers. Armey and company cite two primary weaknesses in the national sales tax proposal: First, the government's ability to collect income taxes was written into the Constitution with the 16th Amendment, so Congress could not end the income tax simply by implementing a new sales tax. The old taxing power would always be there unless the 16th Amendment were repealed by a two-thirds vote in Congress and three-quarters of the states. Until the amendment is repealed, Congress would simply be giving itself a new taxing power without eliminating the old one.

Second, proponents of the flat tax claim that sales taxes are hidden and therefore easy for politicians to raise. Because the income tax forces people to sit down and make an accounting to Uncle Sam once a year, they are more aware of exactly what they're paying and more likely to resist any tax increases.

For his part, Mr. Emmith doesn't believe such objections are valid reasons to stick with the income tax. "Yes, the 16th Amendment needs to be repealed to ensure that the income tax never comes back again," he agrees. "But is that unrealistic? Back in the early 20th century, it was highly unlikely that the 16th amendment would pass, and look what happened. So I don't understand why they say that repeal is so unlikely."

And what of the argument that sales taxes are "hidden"? "I don't believe that whatsoever. When you get a register tape, it's right on there: sales tax. Anybody who has a basic understanding of arithmetic knows that if you have a 15 percent sales tax and you buy $100 worth of goods, that's $15 going to Uncle Sam."

Then he counters with some of his own criticisms of the flat-tax proposal: "Our belief is that a flat tax becomes a fat tax. Who's to say that a flat tax wouldn't regress to the kind of system we have today?" History would seem to bear out this concern. During President Reagan's second term the income-tax system was flattened to just two rates. Since that time, however, more than 4,000 separate changes to the tax code have created once again a system with five different tax rates. Mr. Emmith points out that a sales tax, by definition, eliminates once and for all the confusion of varying tax brackets, since everyone is paying the same rate on all purchases. Furthermore, to prevent the "fat tax" syndrome, the Schaefer-Tauzin Act requires a two-thirds supermajority to pass any increase in the rate of the national sales tax.

Despite their differences, however, neither side wants to lose the tax-reform war because of skirmishing over tactics. Mr. Armey even issued a statement attempting to smooth over differences between himself and his chief congressional rival: "While we have different approaches, Bill Archer and I are deeply committed to the goal of achieving a pro-growth, single-rate tax system that eliminates the bias against saving and investment, promotes economic growth and job creation, and eliminates the special treatment of favored interests."

But the American public appears to be just as divided over strategy as are the congressional architects of tax reform. For instance, the National Federation of Independent Business, one of the most potent lobbying groups in Washington, hasn't taken a stand on tax reform because its 600,000 small business-owner members can't reach a consensus. "What we're hearing from our members is that they want tax reform--flatter, fairer, simpler. They're telling us the system is too complicated, they pay too much, and it doesn't allow them to do what they do best, which is run their businesses and create jobs. But when you talk about specific ideas--flat tax, national sales tax--they're all across the board on that."

David Emmith believes that all the debate over tactics misses one fundamental difference between the two proposals: The national sales tax is ideologically superior because it is closer to the system envisioned by the nation's founding fathers. No matter how flat the income tax is structured, he says, "you still have citizens reporting to the government how much they earned. We don't believe the framers of the Constitution intended for the citizens of this country to go into their private papers and effects and make reports to the federal government. I certainly don't like having to open up my personal files to the government. With them you are guilty until you prove yourself innocent."

Though Mr. Emmith sees this as the "gut-level issue" that will win people over to the national sales-tax proposal, the fact is that neither method of tax reform has caught the public imagination to the extent one might expect. Despite all the policy wonks and armchair political quarterbacks living in northern Virginia, the monthly meetings of the CATS chapter there draw only about a dozen taxpayers on a consistent basis. And despite a wealth of information in an easy-to-understand format, the national organization's web page has drawn just 6,000 visitors since January 1, when interest in tax issues should be at a peak.

Mr. Emmith agrees that attracting passionate interest to the issue of tax reform can be difficult; people simply assume that reform proposals, like the tax code itself, are something that only a trained accountant can understand. Still, he predicts that as Congress debates the issue in the coming months--House Republicans have made tax simplification one of their priority issues for the 105th Congress--taxpayers will begin to pay closer attention.

Until they do, "No IRS" will remain more fashion statement than reality.