Think tanks wrap-up

WASHINGTON, April 15 (UPI) -- The UPI think tank wrap-up is a daily digest covering opinion pieces, reactions to recent news events and position statements released by various think tanks. This is the first of two wrap-ups for April 15.

The Cato Institute

WASHINGTON -- Ten outrageous facts about the income tax

By Chris Edwards

As you struggle to prepare your taxes this year, you may take some comfort in knowing that your headache is being felt across the country. The following odd and outrageous facts show how widespread income tax problems are:

1. The U.S. "tax army" is bigger than the U.S. army in Iraq. Income taxes are so complex that there are up to 1.2 million paid tax preparers in the country -- six times more than the number of troops in Iraq. The tax army includes legions of accountants, lawyers, and computer experts -- some of the best minds in the country. Unfortunately, their brainpower is adding little to the nation's standard of living.

2. A tax form for every special interest. As the income tax grows more complex, the number of IRS tax forms has jumped from 402 in 1990 to 526 by 2002. Congress hands the accountants business on a silver platter when they create special interest tax forms such as "8845-Indian Employment Credit" and "8834-Qualified Electric Vehicle Credit." When Congress penalizes an activity, we get tax forms such as "6197-Gas Guzzler Tax." It's time to end the micromanaging and adopt a simple flat-rate tax. Until then, Congress needs to supplement "6478-Credit for Alcohol Used as Fuel" with form "XXX-Credit for Alcohol Used for Drinking."

3. Double-tax on dividends: 60 years and still not fixed. Sixty years ago, a Treasury report noted that "double taxation of corporate profits is the principal problem raised in connection with the corporation income tax." In the 1930s, a Treasury report argued that the tax disincentive to pay dividends caused corporate management problems. Recent scandals proved them right. Congress should bite the bullet and reform dividend taxes now -- before the next round of corporate scandals begins.

4. Congress promotes discrimination through the tax code. The front of the Supreme Court building boldly declares "equal justice under law," yet the income tax has hundreds of discriminatory provisions. For example, homeowners are treated more favorably than renters since they can deduct mortgage interest and other itemized deductions. Consider that a higher-income homeowner can effectively deduct car loan interest by shifting around his finances but a lower-income apartment dweller cannot. Americans would not stand for such discrimination on other taxes -- imagine if each shopper at Wal-Mart was assigned a different sales tax rate!

5. Congress on tax complexity: Who us? Congress frequently holds hearings on tax simplification so members can denounce the tax code's complexity. Each time, congressional experts and outside think tanks provide useful simplification ideas. Then when the TV cameras are turned off, Congress promptly ignores them and votes for more special interest breaks. The result: The number of pages in the tax code and regulations doubled from 26,300 in 1984 to 54,846 by 2003, according to tax publisher CCH. (The total number of pages when federal taxes began in 1913? Four hundred.)

6. AMT designed to catch 155 taxpayers will soon catch 37 million. The alternative minimum tax is an unneeded parallel tax system alongside the ordinary income tax. It began life in 1969 after Congress was shocked (shocked!) to learn that 155 wealthy individuals were not paying tax because they used too many of the deductions that Congress had provided them. The AMT has been a complex nuisance ever since. But this dumb idea aimed at the rich is set to explode on the middle-class as the number of AMT taxpayers skyrockets from 3 million today to 36 million by 2010.

7. Voluntarism works for the U.S. military, not the income tax. For years, officials have hailed the income tax as a voluntary system. The Treasury calls it "our voluntary tax system." The IRS says that it pursues "enforcement programs to promote voluntary compliance" and establishes "strategies to maximize voluntary tax law compliance by emphasizing customer satisfaction." But with 32 million IRS penalties assessed each year and about $10,000 in income taxes imposed on each taxpaying household, the tax isn't voluntary and these customers aren't satisfied.

8. Congress can't figure out how to measure "income." Although the income tax is 90 years old, Congress still can't figure out how to measure "income." Some income such as municipal bond interest is not taxed, but other income such as dividends is taxed twice. The income tax treatment of savings is particularly incoherent and unstable. For example, there have been 25 major changes in the capital gains tax since 1922. The solution is to replace the income tax with a low-rate tax that exempts savings.

9. Family saving shouldn't require an advanced math degree. Shouldn't saving for education, retirement, and other items be as simple as putting money in the bank? Instead, Congress has manufactured hundreds of special savings rules, such as for 401(k)s, Keoghs, deductible IRAs, nondeductible IRAs, education IRAs, Roth IRAs, traditional pension plans, annuities, SIMPLEs, SEPs, MSAs, and others. The IRS guide to IRAs alone is 105 pages long! President Bush's initiative to consolidate the savings plans and create a universal IRA would be a good step to bring some sanity to this mess.

10. Income taxes: A bad idea that got worse. The income tax is not an example of a good idea gone bad. It was bad from the beginning, and it just keeps getting worse. The income tax distorts financial planning and business investment, and it encourages tax avoidance and evasion. Because the income tax is built on an unworkable base of "income," the law is continually changing. Let's simplify Americans' finances and disband the tax army by pursuing fundamental tax reform.

(Chris Edwards is director of fiscal policy studies at the Cato Institute.)

The National Center for Policy Analysis

(The NCPA is a public policy research institute that seeks innovative private sector solutions to public policy problems.)

DALLAS -- Tax Day

By Bruce Bartlett

April 15 is like a national holiday for conservatives. It is the one day each year when Americans are forced to think about the cost of government. That is why many conservatives have long thought that tax day should also be Election Day. A review of polling data on taxes by Karlyn Bowman of the American Enterprise Institute suggests that conservatives would indeed gain from such a move.

Since 1947, the Gallup Poll has regularly asked Americans whether they think their federal taxes are too high, too low or just right. Historically, large majorities say that their taxes are too high. The peak came during the Korean War in 1952, when 71 percent said so, with just 26 percent saying their taxes were okay.

The low point came in 1949, just after a Republican Congress rammed a big tax cut through over President Truman's veto. At that time, just 43 percent of Americans thought their taxes were too high, with 53 percent saying that they were about right.

Generally speaking, however, the percentage of those saying that their taxes are too high has been well above 50 percent. At no time has the number of those saying their taxes are too low been above two percent, and in most years the percentage has been too low to even measure.

Not surprisingly, the number of Americans saying that their taxes are too high has tended to peak just before big tax cuts or after tax increases, hitting lows -- as now? -- just after tax cuts have taken effect. They also tend to view their taxes as higher after April 15 than before.

For example, in February 1962, 48 percent of Americans thought their taxes were too high. By June of that year, the figure had jumped to 63 percent. In April 1994, 56 percent of people said their taxes were too high, but by December 66 percent said so. In neither case were there any changes in federal income taxes between the two surveys.

One reason why people view their taxes as excessive is because they think that the vast bulk of it goes for nothing. Polls normally show that about 50 cents of each dollar people pay in taxes is wasted. Just 18 percent of people feel that they get good or excellent value for the taxes they pay, while 34 percent say that they get a poor return on them. This is important because three-quarters of people say that how their money is spent bothers them more than the amount of taxes they pay.

People also don't like it when taxes are imposed solely to redistribute income. Forty to 50 percent of Americans regularly say that it is not the responsibility of government to reduce income differences between people. For this reason, three-fifths of Americans routinely tell pollsters that they favor abolition of the estate tax, even though if affects just the richest two percent of the population.

Americans have always favored lower tax rates than the government actually imposes. In 1941, one the eve of World War II, the average amount of taxes that people said a family making $100,000 should pay was just 10 percent. At the time, the top tax rate was 81 percent and $100,000 was equivalent to $1.1 million today.

In 1995, people were asked what the highest percentage was that any family should pay, regardless of income. They said 19 percent. Even when asked specifically about a family making $200,000 per year, they said that 25 percent was the most they should pay. In fact, they paid 36 percent in 1995.

The latest poll shows that the most anyone should pay is a percentage in the high teens. A Fox News poll in January found that 17 percent was the average rate, but 10 percent was the median. That is, half of all those asked thought that 10 percent was the most anyone should pay. Consequently, it is not surprising that a flat rate income tax polls well every time the question is asked.

Today, we have rising deficits and an effort underway in Congress to cut taxes. Almost all Democrats and a few Republicans say that it makes no sense to cut taxes when deficits are rising. But most Americans do not believe that deficits are caused by tax cuts. In fact, a Democratic poll by Penn, Schoen and Berland in May 2002 asked people if they thought that tax cuts increased deficits or reduced them by raising economic growth and revenues. Fifty-six percent favored the latter position and only 34 percent supported the former. Among swing voters, 69 percent said that tax cuts don't increase deficits.

This review suggests that Americans are much more in tune with Republican ideas about cutting tax rates -- even for the rich and even when the budget is in deficit -- than Democratic ideas about soaking the rich and raising taxes to pay for new programs.

(Bruce Bartlett is a senior fellow with the National Center for Policy Analysis.)