As Congress returns to work, the President's Advisory Panel on Tax Reform will present its report on "revenue neutral policy options for reforming the Federal Internal Revenue Code."

The panel, which is chaired by former U.S. senators Connie Mack (R., Fla.) and John Breaux (D., La.), was instructed to come up with ways to "simplify federal tax laws to reduce the costs and administrative burdens of compliance. . . share the burdens and benefits of the Federal tax structure in an appropriately progressive manner . . . and promote long-run economic growth and job creation."

The President’s panel will surely come to the conclusion that the U.S. has an appalling tax system. The current system is politically motivated in the sense that members of Congress amend the code to reward their friends and punish their enemies. And every taxpayer knows that the tax system is exasperatingly complex, oft times incomprehensible, time-consuming to comply with, and frustrating. In his new book, "Flat Tax Revolution", author Steve Forbes defines the problem:

* Since President Regan’s term in office, the tax code has been amended 14,000 times and is 60% longer
* In terms of taxpayer time, the cost of compliance has risen 67% in the past decade and a half.
* Americans spend over six billion man-hours each year to fill out tax forms, costing the economy $200 billion.

What should the president's panel recommend? It should recommend a tax code that will raise at least the current revenues, is simpler and easier to comply with and demands less cost, time and effort by everyone.

One option available is replacing personal and corporate income taxes, Social Security and Medicare payroll taxes, capital gains and estate and gift taxes with a 30% national sales tax. With a national sales tax, we would pay taxes every time we purchase items instead of when we earn income, and we would get a refund from the government to offset purchases of essentials, such as food and clothing. However, as pointed out by Mr. Forbes, a 30% raise in the cost of housing and college education, along with government purchases such as military and medical supplies, would be economically devastating. And to manage such a system, let alone trying to integrate it with the different state and local sales tax systems nationwide, would be costly and challenging.

Even more important, before enacting the national sales tax, we would have to repeal the 16th Amendment of the Constitution, which authorized the personal income tax, or else we would have the current income tax burden and a national sales tax.

A better solution, and one which was advanced nearly 10 years ago by the National Commission on Economic Growth and Tax Reform: "a single, low tax rate with a generous personal exemption" or, in other words, a flat tax.

Under a flat income tax there would be one rate (Mr. Forbes recommended 17%), with a personal exemption of $13,000 per adult and $4,000 per child or dependant, along with a $1,000 per child tax credit. Therefore, a family of four would pay no federal income tax on its first $46,000 of income. There would be no double taxation of dividends, capital gains taxes, death taxes, or taxes on Social Security benefits. The tax return would be simpler and much simpler to fill out: From your wages and salary subtract your personal and dependent exemptions and multiply the result by 17%. It would almost be a tax on a postcard, which is a huge improvement over the massive complexity of the current Internal Revenue Code. Corporate profits would be taxed at a flat 17% as well.

What would the impact of such a system be on Federal tax receipts? The impact would be a very positive one, because income tax rate reductions have a tendency to raise income tax receipts. In the 1960s the Kennedy income tax cuts reduced top rates from 91% to 71% and boosted revenues by one-third, raising the four-year average annual tax revenue growth from 2.1% to 8.6%. During the 1980s, the Reagan tax rate reductions saw tax revenue increase 56% over eight years.

The reason for such increases in tax receipts is economic growth because lower tax rates mean higher economic growth, more investments, more jobs, greater incentive for people to work harder in order to earn more money. And, when this occurs, the economy expands, which in turn means more government tax revenue.

Flat tax opponents say it would unduly help the rich. However, a lower flat tax rate is joined with eliminating both deductions and loopholes; the manipulation of taxes by the wealthy would vanish and all taxpayers would have to play by the same rules. Other critics say that charitable contributions would drop. However, historical experience has shown that this isn’t true. In the past 40 years, tax rates rose and fell a number of times, but charitable contributions has constantly risen and the fact is that, when people have more money, they contribute more money.

President Kennedy had the right idea, in that lower tax rates are "the rising tide that lifts all boats." Steve Forbes has estimated that his 17% flat tax would increase annual federal revenues $56 billion. A simple flat tax, instead of the complex IRS tax system, frees six billion hours a year of our time along with many billions of our income dollars, which are currently expended to comply with our tax laws, to spend more time working harder and investing more in our communities.

Such a tax reform plan meets America's goals: it is both simple and understandable, it applies to everyone, it gets the federal government the revenues it needs, and would stop congress manipulating the tax system. Most important of all, the U.S. needs stronger economic growth, and the flat tax would assist in generating it.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.