As the midnight tax deadline comes and goes, the debate for tax reform rages on. Following a background report, Margaret Warner and guests discuss the current tax code and the debate to reform it.
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April 15, 1998
A background report on reforming the tax code.
February 3, 1998
Charles Rossotti, the new IRS chairman, on the future of the agency.
October 22, 1997
The Senate Finance Committee's investigation of the IRS.
October 10, 1997
President Clinton proposes his own IRS reform plan.
September 25, 1997
The Senate Finance Committee continues its hearings on the IRS.
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A discussion of how the IRS treats regular taxpayers.
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A panel discussion on the embattled IRS.
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MARGARET WARNER: And for more on the possibilities and prospects of fundamental tax changes we're joined by Marvin Chirelstein, a tax law professor at Columbia University and author of Federal Income Taxation, a widely used legal textbook. Denis Calabrese, chief strategist for Americans for Fair Taxation, a grassroots advocacy group that wants to replace the current income tax system. And Jeffrey Birnbaum, Washington bureau chief for Fortune Magazine. He is co-author of Showdown at Gucci Gulch, the story of the last time Congress and the White House overhauled the tax code in 1986. Welcome all.
Jeffrey Birnbaum, every year at this time--at tax time, every campaign year we hear politicians talking about changing the tax code. Why does our tax code look the way it does today?
"It started as a 14-page law in 1913....And now the income tax code is over 9,000 pages long."
JEFFREY BIRNBAUM, Fortune Magazine: Well, the modern tax code was begun in 1913, there was one briefly--most people don't realize it--back during the Civil War. Lincoln actually had one. But after the 16th Amendment was passed, 16th Amendment to the Constitution, allowing a tax on income in this country, from 1913 until now, the tax code has basically grown. It started as a 14-page law in 1913. It was a one-page form. And now the income tax code is over 9,000 pages long. The real break in this was World War II basically. It started out from 1913 to World War II basically was just a few hundred thousand of the richest Americans paid income taxes. And then World War II made it a mass tax. And the rates have gone up and down and they've been high as 94 percent. There have been several major tax cuts and through the years some very serious disagreement about the income tax have been very controversial. I think it reached a crescendo back in 1985 and 1986, which led to the largest rewrite of the modern tax code in history, the 1986 Tax Reform Act. And it reduced the number of tax rates that had once been quite large, just down to two, and reduced the amount of exemptions to the tax code. But I think in each case it's been--the tax code has been like a bush where it's been trimmed back to be trimmed back almost to the roots, and it was trimmed back in 1986. But, like a bush, it grows back.
MARGARET WARNER: With more branches.
JEFFREY BIRNBAUM: More branches everywhere. And I think that's, more or less, the history. You can trim it back, but it always grows back with special exemptions, more tax rates, and almost anything you do leads to that. At least, that's been the history of the income tax.
MARGARET WARNER: Mr. Calabrese, you'd like to buck that history. You really think the tax code needs radical restructuring. Why? What is fundamentally wrong with the current system?
DENIS CALABRESE, American for Fair Taxation: Well, the popular things to discuss that are wrong with it are things that Jeffrey was talking about. It's a tremendously complex tax code. Ironically, if you want to be honest and comply, it's almost impossible. There were 34 million civil penalties given out last year by the IRS. And if you want to cheat, it's easy. It's the worst of both worlds. Additionally, it punishes the things we try to encourage in this country, which are saving and investment, and people trying to improve their condition through building a nest egg. And we punish that with our tax code. What we need to do is we need to tax people on what they consume, what they take out of the economy, and not what they produce, or what they use to build the economy. So the foundation of this--and I like Jeffrey's analogy of a bush--we try to trim it back. It grows even more. What we need to do, as Congressman Bill Archer likes to say, is tear it out at its roots and start with a consumption-based tax.
MARGARET WARNER: And, Professor Chirelstein, I know you disagree, but make the case for the current tax system.
"...the system is immensely successful in collecting revenues."
MARVIN CHIRELSTEIN, Columbia Law School: Well, one case to be made is that the system is immensely successful in collecting revenues. We collect a trillion, three hundred billion dollars a year through the administration of our tax laws, and that's done largely by voluntary compliance with those laws. And I think anyone would regard that as an immense achievement. Now, as to complexity, the code is too complex, too long. No one would deny that. But the reason for complexity is that Congress tries to do so much with the Internal Revenue Code beside raising taxes. The consequence of that is that the Internal Revenue Service is administering dozens and dozens and dozens of different programs for which the tax code is used as a vehicle.
MARGARET WARNER: Like what?
MARVIN CHIRELSTEIN: Well, for example, the home mortgage interest deduction. We provide--the tax code provides a subsidy to homeowners because we think home ownership is a valid national goal. It's the Internal Revenue system that is the vehicle for that subsidy. Yet another simple example, we want to subsidize charities because we think charities do good things. Again, the Internal Revenue Code is the vehicle for the charitable subsidy, and the Internal Revenue Service is left to administer it. If all of the various programs that Congress supports--many of which are valid and desirable--were stripped out of the income tax, it would be quite a simple system, so my point to you is that it isn't the nature of the income tax that leads to such complexity, but the immense quantity of special programs for which the income tax is being used.
MARGARET WARNER: Mr. Calabrese, what do you think should be the objective, if Congress were to get serious about really overhauling the tax code, what's the ultimate objective, other than collecting revenue? I mean, is it fairness? Is it efficiency? What should it be?
DENIS CALABRESE: Well, I think both those are laudable goals: fairness and efficiency. We studied this for quite a few years among the American public and with tax experts. I will tell you what the American public wants. They want a fair tax code. If Congress wants to subsidize or encourage a specific activity, they need to do it honestly, and that is appropriate the money and vote the money for it.
MARGARET WARNER: You're talking about the activities that Professor Chirelstein just mentioned.
DENIS CALABRESE: And many others. Anything that Congress wants to support, the honest way is to do it visibly, is to appropriate money for that and let everybody see it. The tax code hides--and the professor is right--many things that Congress wants to do it rewards its friends and punishes enemies through the tax code. The American public is pretty straightforward in what they want. The government needs to raise money. That's fine. The best way to do that is to let you take home your whole paycheck so you eliminate the federal income tax, the corporate tax, the gift and estate tax, capital gains, no more withholding from the paycheck, you take home your whole paycheck because you earned it, and then if you save it or invest it, you're not taxed on it. If you go out and spend your money, then you're taxed by the federal government. That is a fair system. That is a loophole-less system, and it also can succeed in raising the requisite amount of revenue for the government.
JEFFREY BIRNBAUM: I wanted to make just a couple of points. One is that--what was just described as a national retail sales tax, which is one of the alternatives out there. Another is a single rate or near single rate--a flat tax that would continue to tax income, rather than just consumption. It's another alternative that's out there. Both of these alternatives--in fact, all of the tax overhaul ideas that are out there have a problem with them, politically speaking, and that is--there is a war between simplicity and fairness. I'm sort of taking off on the professor's notion, that is, you could have a very, very simple tax like the retail sales tax or a single rate flat income tax but you would eliminate the kinds of exceptions and subsidies that a lot of people do consider fair, like the mortgage interest deduction, the charitable deduction, the deduction for state and local taxes. That was a very big issue back in the 1986 tax reform bill. The reason for the complexity is not simply that the tax code is used to conduct all sorts of social programs and economic programs but giving things that the American people as voters ask their representatives to give them. And so the fairer, that is the more of these things that people want and consider fair and important, the more they get, the more difficult it is to also have a simple tax.
MARGARET WARNER: Professor, would you agree with that, the fairness is sort of in the eye of the beholder?
The search for a fair tax distribution.
MARVIN CHIRELSTEIN: Well, I think there's an aspect of fairness that hasn't really been mentioned, and that's the distribution of the tax burden. If we have a retail--national retail sales tax, or the sort of flat tax, which means a wage tax, that Congressman Armey proposes, the distribution of the tax burden in this country would change very dramatically. 
Lower income people under a national retail sales tax, lower income people would pay a higher rate of tax as a percentage of their income, and that would continue to be true up to income levels of about $75,000.
MARGARET WARNER: And is that because--
MARVIN CHIRELSTEIN: And at that point--
MARGARET WARNER: Excuse me just for interrupting for a minute--is that because people at the lower income basically have to spend almost everything they earn--
MARVIN CHIRELSTEIN: Of course, that's exactly--
MARGARET WARNER: --and the--
MARVIN CHIRELSTEIN: That's exactly why. At the $75,000 level, it turns around and the rate of tax decreases and continues to go down the richer you get, the larger your income. At a plausible rate of sales tax the highest 1 percent in this country would save taxes relative to their present burden of about $80,000 a year on average. Someone has got to pick those taxes up if the plan is to be revenue neutral and the persons who would pick it up, of course, are persons much farther down the income scale. If that strikes you as fair, I will be astonished.
DENIS CALABRESE: Let me respond to that because that's the regressivity argument. Although some sales taxes have that problem, if you study, for instance, the fair tax, you can build a tax, the fair tax, for instance, that is as progressive as the current system. The way you do that is this: You repeal the payroll tax, which is the most regressive feature of our current tax system, which helps the lowest income group the most. Second of all, you allow them not to pay taxes on essential goods and services. So anybody up to the poverty level, let's say family of four, $15,000, pays no sales tax, and third of all, you strip out all the hidden taxes in the products they're paying right now. When that lower-income person goes to the store and buys a good or a service, there are income taxes hidden within that product, the corporate tax, the payroll tax for those employees who made it, and compliance costs. When you take all that out, when you give 'em a rebate, and when you repeal the payroll tax, you can make a tax that is a national retail sales tax that is progressive as the current system. It can be done. It is not mutually exclusive to have fairness and simplicity in our tax code.
MARVIN CHIRELSTEIN: Well, I have to say, if I may, that I don't think any economic study I now of bears that out. But in any event, we've got--
DENIS CALABRESE: We've got a few we'll show you.
MARVIN CHIRELSTEIN: If you substituted a retail sales tax for our income tax, corporate income tax, payroll tax, you would set that retail sales tax at a level that would be unadministerable. It would be around 30 percent if it's to be revenue neutral, and the system, itself, would break down very speedily.
MARGARET WARNER: All right. Let me get Jeff Birnbaum in for a final comment. Is there any prospect in this political year or in this Congress for having any kind of radical tax overhaul?
The politics of the income tax.
JEFFREY BIRNBAUM: Probably not in this current millennium, I think I should point out. The next one is possible. To add a little political reality to this, I believe that most of the politicians who are talking about a major overhaul, though sincere, I think they mostly want to talk about it and not enact it because tax reform in any of its guises--and we've talked about several here--is a very potent political issue because people dislike and distrust the current income tax so much. And they don't want it changed before they can get voters to attract voters to vote in favor of someone who does want to change the current system. So nothing in this year, nothing next year. My guess is that the only chance of a major tax overhaul of any of the kinds we're talking about will not even be possible until at least the year 2001, after the next presidential election, and then only if both the White House and the Congress are in the hands of the same political party. It's actually a better chance if it's in the Republicans' because they're campaigning so hard on the issue.
MARGARET WARNER: Well, great, thank you very much. We have to end it there.
