Most people, reasonably enough, think about taxes solely as a fiscal or budgetary issue; a somewhat smaller number think of them as a proxy for whether the government is too big. In these connections, the main question about taxes is how high or low they should be. But I’d like to suggest that those of us concerned with structural reform in the federal government should be pressing for fundamental tax reform – that is, the junking of our loophole-ridden income tax (with its myriad exemptions, deductions, and credits), in favor of a flat tax or a national sales tax.
The structural mischief done by the tax code stems from its infamous complexity and its inherent subjectivity. Citizens for a Sound Economy estimated that Americans spent 6.4 billion hours filling out tax forms in 2024. But despite the massive inefficiencies that this system imposes on taxpayers, it is extremely efficient at producing campaign checks. The size and complexity of the tax code (5.5 billion words, as of 2024) make it the ideal place to stash thinly disguised gifts to political supporters, and both parties benefit from the practice. In addition, the subjectivity inherent in the question of which citizens should pay more and which should pay less makes it a perennial occasion for class warfare. Nearly everyone agrees that the rich should pay more, but there seems to be no durable consensus on how much more.
Fundamental tax reform would solve the complexity problem. Citizens for a Sound Economy pushes a 17% flat tax that requires only a three-line return, but other options are equally effective at cutting through all the nonsense in the tax code. For example, a multi-tier “flat tax” – e.g, 10% for some taxpayers, 15% for others, and 20% for others – would be extremely simple as long as there were no deductions, exemptions, credits, or other games. We started to move in that direction in the mid-80s, but it did not go far enough to stick.
Better yet, we could move to a national retail sales tax or a value-added tax, which would generate income from the underground economy. Drug dealers, prostitutes, illegal immigrants, and trust-fund millionaires with offshore tax shelters all share at least one common attribute: they buy stuff. Some worry that sales taxes fall hardest upon the poor, but most states have sales taxes and they commonly correct for this regressivity by excluding necessities such as food, medicine, housing, and articles of clothing costing less than a certain amount; since the poor spend much more of their income on such necessities than the rich do, this has the effect of taxing a greater percentage of consumption by the rich.
Fundamental tax reform – whether in the form of a single-tier flat tax, a multi-tier flat tax, or a consumption tax – deserves to be considered as a structural political reform because it would remove one of the principal ways in which special interests coax favors out of their favorite legislators – and in so doing, remove one of the principal means by which incumbents perpetuate their incumbency. Perhaps even more importantly, fundamental tax reform would emphasize our common membership in one community and our common responsibility to ensure that public needs are paid for. For example, if we are already paying a retail sales tax of 25% and we decide to spend $550 billion for a prescription drug benefit, we can either raise the sales tax, cut spending elsewhere, or borrow the money. The one thing we would not be able to do would be to start a big fight about whether the cost of the benefit should somehow be borne by some of our citizens and not others. Even though the rich would pay more tax than the poor (because they buy more stuff, and particularly more unnecessary stuff), every citizen would be subject to that same 25% rate, and would have a clear stake in the spending decisions we face as a nation. That’s a lot of citizenship and a lot of community at a very reasonable price, and we save 6.4 billion hours in the bargain.