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The massive body of tax legislation enacted in the first two years of the Reagan Administration offers little guidance for predicting the future direction of United States tax policy. Dramatically different Congressional coalitions – each led by the President – passed by very narrow margins the nation's largest tax reduction (the Economic Recovery Tax Act of 1981) and then the next year enacted the largest peacetime tax increase (the Tax Equity and Fiscal Responsibility Act of 1982). In each case, short-term political and fiscal concerns dominated the debates. The 1981 legislation reduced taxes in an effort to stimulate economic activity and investment by according substantial tax relief to businesses and high income individuals; the 1982 legislation requires significant additional taxes from these same sources to reduce triple-digit deficits, a reduction also deemed necessary for economic recovery. Although the two Acts together provide for an overall reduction in business taxes and a phased-in decrease in marginal tax rates applicable to individuals, they impart the overwhelming impression that uncertainty, confusion, and inconsistency currently dominate the tax legislative process.

Despite the contradictory aspects of recent tax legislation, however, despair at the prospect of coherent revision of the federal income tax may be premature. During the last Congress, twelve bills were introduced by legislators ranging across the political spectrum, that proposed study or enactment of a so-called flat-rate income tax. The Monetary and Fiscal Policy Subcommittee of the Joint Economic Committee held hearings on the flat-rate tax in July and August of 1982, the tax writing committees directed staff to begin work, and the Senate Finance Committee held hearings on the idea in September of 1982, President Reagan voiced his tentative support of the basic concept, calling it "very tempting," and press commentary has been both widespread and favorable. As a result, the "flat-rate tax" has become the focus of current tax revision efforts.

This Article addresses the problem of the transition to a flat-rate tax. Assuming that Congress wants to enact such a tax, how do we move from an income tax riddled with special exclusions, deductions, and credits to a broad-based income or consumption tax? Both political actors and professional groups, including Senate Finance Committee Chairman Robert Dole, Office of Management and Budget Director David Stockman, Assistant Secretary of the Treasury John Chapoton, the Staff of the Joint Committee on Taxation, and the Tax Section of the American Bar Association, have expressed particular concern with transitional problems, citing the need to protect people who have made economic decisions "in reliance" on the continued existence of special tax provisions.

I argue here that the minimum tax amendments of the Tax Equity and Fiscal Responsibility Act of 1982 placed into the Internal Revenue Code a transitional mechanism that can be regarded as a first step to phasing in a broad-based tax. I then outline a series of future amendments to the minimum tax and other changes necessary to complete the path to a broad-based income tax. Before proceeding to these observations, however, I first describe the flat-rate tax concept and make some general comments on the nature of the transitional problems involved in moving from current law to a broad-based tax with lowered rates. I then trace the intellectual and political origins of the minimum tax provision, describe the 1982 amendments to the minimum tax, and indicate why the minimum tax provides an appropriate vehicle for transition to a flat-rate tax. After illustrating the additional amendments required to move the minimum tax from its current secondary status to center stage as the vehicle for transition to a broad-based income tax, I demonstrate why the 1982 minimum tax amendments will not serve an identical purpose if a broad-based consumption, -rather than income, tax were the ultimate goal.

This Article assumes that a move to a broad-based low-rate tax is both feasible and desirable and accepts the rather convincing case that has been made that a broad-based income tax could be superior to present law on economic efficiency, horizontal equity, and simplicity grounds. I have also generally accepted, at least for present purposes, the view that these goals are more likely to be realized with as uniform and as broad a tax base and low rates as is practical. By limiting my concern here to the problem of transition, I avoid detailed consideration of the merits of particular base broadening issues. Therefore, this Article only briefly addresses some of the many difficult and controversial issues which will arise in the move to a low-rate broad-based income or consumption tax. I attempt here merely to demonstrate that the problems of transition to such a regime, while important, are not insurmountable; that in fact Congress has taken an important first step in this direction in its 1982 amendments to the minimum tax; and suggest a general outline of subsequent steps to complete the path by building on that first step.


Law | Legislation | Tax Law