Tax Reform 1985: The Quest for a Fairer, More Efficient and Simpler Income Tax

Abstract

Recent reports of the demise of the federal income tax—like earlier reports of Mark Twain's death—have proved to be highly exaggerated. Tax-reform efforts have coalesced over the past year on the goal of restructuring the income tax to promote, as the Treasury has put it, "fairness, simplicity and economic growth," rather than replacing the income tax with a consumption tax, as had been recommended by many academics and, in 1977, by the Treasury. This bipartisan consensus has generated three similar, yet distinct, proposals for a "modified flat-rate tax"—that is, a tax that imposes a lower and less progressive rate schedule on an income-tax base that has been broadened by the repeal of many of the tax preferences of current law. These developments should generally be applauded. They reflect an overdue recognition of the problems that have caused the present income tax to become widely perceived as unfair, inefficient and unduly complex. Moreover, they constitute an important reaffirmation of the inherent superiority of an income base over a wage or consumption base as the principal mechanism for the collection of federal revenues. This Article will first offer a brief overview of the three leading proposals for a modified flat-rate tax. This analysis will necessarily be quite general, because the reform proposals are continually being revised and refined. We will next consider why proponents of these tax-reform proposals—including the Reagan Administration, whose tax legislative program had previously focused almost exclusively on capital formation and economic growth—have concluded that an income tax is preferable to a consumption tax for the collection of federal revenues. We will then explore five problems of the current income tax that must be addressed under any comprehensive revision of the Internal Revenue Code: These are the problems of tax expenditures, inflation, the role of the corporate income tax, tax-shelter investments, and compliance. We will conclude by assessing the contributions of the three reform proposals to the quest for a fairer, more efficient and simpler income tax.