Overhaul the Tax System to Create Wealth : Economy: A flat tax on both personal and corporate income would free up money for jobs.

Now that most of us have completed the annual chore of filing our federal and state income-tax returns, it is a good time to reflect on the entire process by which we pay our annual dues to society.

For working Americans, it’s probably the biggest expenditure in their personal budget. For many, the tax bill is a larger expenditure than food, shelter and clothing combined. These taxpayers do not believe that the cost of government is worth the price they are being asked to pay.

Our present tax system is complex, expensive to administer and punishes saving and investing. It is so flawed that we should junk it and start over.

What are the alternatives? One is the flat-rate system proposed by Robert E. Hall and Alvin Rabushka, senior fellows at Stanford’s Hoover Institution. It is a fair, simple, low-cost system that is very friendly toward savings and investments, which serve to create wealth and jobs.

The central feature of this system is a tax rate of 19% on all income above a tax-free amount. In the case of a family of four, there would be a tax-free allowance of $25,500. Millions would no longer pay income taxes, and all wage earners would pay less than they do now.

Another major advantage is that it is a very simple tax. It would permit beleaguered taxpayers to fill out a postcard-size return in just a few minutes. The tax code would no longer be distorted toward trying to solve all of society’s problems through tax breaks for socially beneficial behavior.

In their recently revised book, “The Flat Tax,” Rabushka and Hall point out that it would be a major spur to economic activity. Corporate taxes would be reduced to 19% from the current 34%. It eliminates double taxation of business income by not taxing dividends and capital gains. Interest income would not be taxed, which eliminates disincentives to save.

Compliance costs would save billions of dollars. The IRS would not need billions to update their computers to track zillions of 1099 forms, and 114,000 IRS employees and hundreds of thousands of certified public accountants, enrolled agents and other tax-preparers can be released for work more beneficial to our society.

The flat-rate tax has been under serious discussion now for more than 13 years. I think its time has arrived.

Among the other changes being discussed is the value-added tax. This system, found in several European countries, levies a tax on the value added to products and services as they go through the production cycle. The major advantage is the ease of collection of such a tax. Another plus is the fact that consumption rather than saving is being taxed. A major disadvantage is that it has become merely additive to income taxes rather than a complete substitution.

Another possibility is a national sales tax, which also has the advantage of taxing consumption rather than savings. Although it would tax rich people more, such a tax tends to be regressive, with relatively more burden on low-income persons.

An important feature of the VAT or the sales-tax system is that each would automatically include much untaxed wealth in the “underground economy.”

A major hurdle to changing any tax system is the argument that the “rich” might benefit. Politicians make a career of pushing the envy buttons of the poor in their advocacy of increasing taxes on the more wealthy element of our society.

Tax-the-rich schemes won’t fix the deficit problem. The rich are now soaked pretty heavily. The top 1% income earners pay 25% of all individual income taxes. The world outside the Beltway knows that higher tax rates merely force people with money to seek tax shelters.

Soaking the rich presumes that government will put the extra revenue to better purposes, which is questionable. Besides, the rich can do only a few things with money: spend it and create jobs; save it and provide funds for banks to lend; invest it and create new jobs; give it to charities, which will put it to better use than government, or leave it to their heirs after about half is taken in federal estate taxes.

A society that is more concerned about the redistribution of wealth than about the creation of wealth will certainly produce an equality of poverty, as proved by recent history. In the coming debate, let’s hope that the voices of wealth-creating entrepreneurs drown out those politicians who promote class warfare with their constant bashing of “the rich” and their promotion of income redistribution.