Junking the Tax Code Isn’t the Solution
‘SET’ It Straight Instead

By David A. Lifson

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Forbes calls our current income tax system “a beast whose complexity, confusion and outright unfairness have corrupted our economy and society.” Indeed, any American who has ever filled out a tax form can tell you our tax system is broken. Unfortunately, a 17% flat tax will not work; nor will “junking the entire federal income tax code,” as Forbes suggests.

The NYSSCPA has a better solution. Early this year, the Society convened a blue-ribbon panel of tax experts that developed a proposal for fundamental tax reform by creating a simple, exact, and transparent tax system: the SET tax. It offers a solution to the complexity of the current system and can be used to evaluate other proposals.

The SET tax retains the best aspects of the current Tax Code, eliminates its worst aspects, and adds new benefits. It addresses the key issues in the debate on tax reform and proposes a solution—transparency—that could help future generations make smart decisions about taxes. It is fair, simple, pro-growth, and eliminates the need for an alternative minimum tax (AMT). It would also retain an appropriately high rate to tax the most successful participants in our economic system, and would leave intact all other taxes (payroll, sales, excise), so we would have the predictable, realistic ability to fund our government.

The SET tax is a single-rate, progressive system. Unlike Steve Forbes’ flat tax and all other single-rate tax-reform proposals, the SET tax can continue taxing higher incomes at higher rates. It can also maintain current provisions directed at special-interest groups to provide fairness, savings, and investment incentives for economic stimulus, and it will provide appropriate federal government revenues based on income-tax principles and rules we already use successfully.

By eliminating fuzzy math that too often transforms individual tax provisions deploying logical tax policy into uncertain practical use and comprehensibility in an overly complex code, the SET tax transforms the code into a manageable, understandable, and flexible tax system. The SET tax translates the provisions of the Tax Code into a simple, single formula:

(Income – Congressionally Defined Exclusions) x Rate = Tax

The tax rate in the SET system is always the highest rate at which incomes are taxed. It attains progressivity through congressionally defined exclusions that implement all tax policy. For example, if the single rate was 36%, an 18% tax bracket for incomes between $30,000 and $50,000 would be created through a 50% exclusion for those incomes. In the SET system, taxpayers would not need to make these calculations; the government could easily translate political progressivity goals into look-up tables. Some exclusions would remain complex to deal with complicated taxpayer situations. The complexity would generally be as progressive as the tax rates, creating difficult compliance tasks for taxpayers that invest in sophisticated transactions. The vast majority of taxpayers, however, would deal with only a few, relatively simple exclusions.

The SET tax works equally well for corporations and other entities. It does not change who is taxed; it just makes it transparent—easier to pay, understand, collect, and administer.

The SET tax will promote prodigious economic growth and will integrate easily with the current tax system. It involves no new concepts to learn, and many old loopholes will disappear. Another significant benefit is that the SET tax lends itself to simpler scoring: Congress can better gauge the cost of tax-policy initiatives, and taxpayers easily identify how much they receive in tax benefits.

The President’s Panel on Federal Tax Reform announced in July that any new tax reform proposal must include a revenue-neutral solution to eliminate the AMT. The SET tax will obviate the need for an AMT (both corporate and individual) and provides an elegant, revenue-neutral solution: Congress can easily define exclusions to raise revenues from the same (or different) taxpayers, in a transparent, easy-to-understand way.

Steve Forbes is absolutely right to call on President Bush to be bold and not “take a conciliatory path that supports only superficial reforms.” But asking President Bush to “pull a Ronald Reagan” and demanding that Congress destroy this hideous tax system, the way Reagan demanded that Mikhail Gorbachev tear down the Berlin Wall is unnecessary. The “wall” that is our tax system is certainly broken, but the underlying foundation, our Tax Code, is the very mortar upon which our nation has been built. Destroying it would mean throwing away everything we have worked so hard to achieve and that makes this the best, most prosperous country in the world.