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Ever Felt Like Killing the IRS?

August 17, 2004|Judy Dugan

A long-simmering desire of some conservatives to kill the evil Internal Revenue Service has come out into the open this election season. House Speaker J. Dennis Hastert of Illinois, Rep. Tom DeLay of Texas, Sen. Sam Brownback of Kansas and other quieter followers have gone public with calls for either a flat national sales tax or a flat income tax to replace the insanely complicated and loophole-riddled federal income tax laws.

Of course, there is every chance that Hastert and friends are merely conducting a flanking maneuver, gathering up the decades-old flat-tax cadre of the conservative movement into the Bush reelection camp without actually forcing President Bush to support a proposal that stands no practical chance of being passed during a second term.

But having been voiced, specifically in Hastert's new autobiography, "Speaker," the sales tax idea (comprehensively laid out by GOP Sen. Richard Lugar of Indiana in 1995) is intriguing enough to deserve a closer look.

The sales tax idea is simple, and that's its biggest intellectual selling point. Instead of taxing income, the federal government would institute a really high sales tax, which would be collected by retailers and other sellers.

Unlike a flat income tax, it would succeed in eliminating the IRS. Because people would have so much more disposable income, goes the theory, they wouldn't be deterred from consumption by the tax, which would probably have to be in the 30%-plus range to replace current federal revenue. That's according to economists who've tried to add and compare, a notoriously slippery task when talking about trillions.

But the debate has to start with some kind of percentage. Proponents like the idea of a tax of about 20%, which probably is not enough to support anywhere near the current level of federal spending, much less provide for a bit of deficit reduction. State and local sales taxes would be on top of the federal slice. Shrinking government is a secondary aim of most flat-taxers, so they do mean it when they talk about 20%.

Opponents, including Democratic presidential candidate John Kerry, correctly point out that under a high national sales tax (or a flat tax of any kind), the poor and middle class wind up paying the highest percentage of their incomes to the government. Families who are already spending almost everything they earn on food, clothing and a ratty old car wouldn't need fewer of these things, and they would end up in worse condition.

If food and clothing are exempted, or if poor people are given a tax rebate, the tax system starts to get re-complicated, while the sales rate on everything else, including yachts, gets higher.

Richer people also have a lot of choices about how much they buy and could well make do with Grandma's old Persian rugs instead of a houseful of new broadloom. That puts in doubt the assertion that consumption wouldn't go down.

The most interesting problem of the new proposal is how to enforce it. Consider the number of people already crossing the Mexican and Canadian borders just to get their arthritis drugs for 40% less. Cigarette smuggling is an even better model. Translate that to groceries, jewelry and laptop computers, creating a huge potential black market for the middle class.

A vacationing couple couldn't easily come back from Tijuana with a washing machine in the trunk, but what with free trade, truckloads of stuff come across the border all day, and Mexican trucks are about to be allowed to head deeply into the United States to deliver their goods.

The whole idea of free trade is to reduce tariffs, not collect taxes at the border. What if a group of friends orders a truckload of major appliances from a Mexican wholesaler and that truck just drops off its cargo at households from San Diego to Woodland Hills?

Californians are already "required" to declare purchases from out of state on which they did not pay sales tax, and pay up along with their state income tax. How many people even know about that? It's certainly not touted as a big potential source of new revenue in Gov. Arnold Schwarzenegger's California Performance Review.

Would there then arise an army of sales tax police knocking on the doors of single-family homes and demanding the receipts for the 3-year-old Whirlpool or the new double-door Frigidaire with ice maker? The IRS would look like a social service agency by comparison.

These problems don't mean the whole idea of fiddling with sales taxes should be thrown out. In California, goods are taxed but not services, like legal and financial help. One small but useful reform idea is to broaden what's taxed, increasing revenue but also allowing for a small reduction in the overall sales tax rate. That would be more fair instead of less fair and might even allow a slight flattening of the state income tax.

The most burdensome of federal taxes, proportionate to income, is the payroll tax for Social Security and Medicare. It already falls most heavily on the poor and middle classes because the Social Security portion is currently capped at $87,900 of salary. For CEOs, it amounts to pocket change.

Why not, as some tax reformers have suggested, convert just the payroll tax to a broad sales tax or a value-added tax, which is paid in increments from manufacturing to retail of goods?

What Hastert and friends propose will not come to pass, except for the political benefit in a nod to their flat-Earth wing. But they deserve some thanks for generating debate on what a sales tax is and what it should be.

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Judy Dugan is deputy editor of The Times' editorial pages.

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