How To Simplify the Crazy Tax Code

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AMERICANS HAVE ALWAYS HATED taxes, from the Boston Tea Party to "Read my lips." But this year -- this week -- the nation's enmity carries a new emphasis. Taxpayers are angered not only by how much they pay but also by how little the other guy pays, by the sense that the system is somehow corrupt, and by the reality of just how complicated the tax codes are. A poll conducted late last month by the New York Times and cbs found that 59% of Americans considered the federal tax system to be unfair.

Their feelings are aggravated by the growing realization that despite all the talk of simplification in recent years, the laws are now more complex, not less. The last effort at tax reform, in 1986, has instead brought "more complexity, a reversal of the trend toward more progressivity . . . and a dramatic slowing in the rate of U.S. job creation," concluded a recent study by former Treasury Department tax experts Gary and Aldona Robbins.

Economists and politicians of many stripes charge that the 1986 reforms have dragged down the U.S. economy by punishing hard work, thrift and investment while encouraging Americans to borrow and spend beyond their means. Council of Economic Advisers chairman Michael Boskin argues that the 1986 law "sharply reduced incentives for investment, and we're paying a price for that in slower < growth." Liberals attack the current system as both unfair and unproductive. Robert Shapiro, a domestic-policy adviser to Democratic presidential front runner Bill Clinton, charges that "our tax code has been encrusted with layer upon layer of distortions of market signals . . . It undermines the productivity of the entire economy."

No wonder Jerry Brown's proposed "flat tax" of 13% on income -- allowing deductions only for mortgage interest, rent and charitable contributions -- combined with a 13% national sales tax on goods and services has found so much resonance in the current campaign. But the Brown plan is not well thought out. It would raise taxes on the working poor, cut taxes on the wealthy and further swell the budget deficit. It is more simpleminded than simple, less a plan than a slogan.

Nevertheless, Brown may be onto something. Behind his flat tax is the basis for real American tax reform -- an idea that has been around for years but now is gaining intellectual support and public attention.

What makes sense, many economists are arguing, is to junk personal and corporate income taxes altogether for a single "direct-consumption tax" on what people spend rather than on what they earn. In some ways, a direct- consumption tax would resemble a reformulated income tax: it would be assessed by calculating an individual's total income and subtracting the amount that he or she saved and invested. All forms of income would be counted, including wages, interest, dividends, capital gains, Social Security benefits and employer-provided health insurance. The savings and investments that could be deducted might include spending on education and job training. A similar formula could be used for taxes on businesses.