FRESH FROM THE RIVER STYX: THE ACHILLES’ HEELS OF TAX REFORM PROPOSALS

Abstract- Tax reform discussions frequently ignore or minimize tax avoidance and tax evasion implications. Current proposals create tax planning opportunities and raise compliance issues. The employee-independent contractor distinction and time value of money principles are important in the Flat Tax and USA Tax. The resale exemption of the National Retail Sales Tax will invite tax evasion, and the intangible property exemption will result in tax avoidance. Tax planning and compliance issues also are relevant in considering any reformed income tax. A proper focus on likely tax planning responses to all fundamental reform options is important if simplification and revenue objectives are to be realized. Every tax system has Achilles ’ heels. Theorists advocate simplicity; reality produces complexity. On Sunday morning, our national leaders speak of fairness; during the workweek, the legislative process yields inequality. Economists preach efficiency; interest groups advocate special treatment. Moreover, in the real world, every tax system is vulnerable to tax avoidance and tax evasion, much of it unantici-pated during the legislative process.1 Thus, every tax system has Achilles’ heels. The “real world ” is comprised of at least three phenomena. The first is the difficult technical process of translating a theory into law. It is a long road from the articulation of an idea to the production of workable statutory language, and, understandably, the drafter will not always get it right. The second fact of life is the inevitable influence of the political process on the ultimate design of enacted tax legisla-tion. To underscore this point, I refer to what might be the most significant threat to the enactment of an economi-cally rational and structurally sound consumption tax; namely, transition. Should an enacted consumption tax contain substantial transition relief for old capital, it is not clear whether the economic objectives of the new regime will remain achievable and what tax avoidance opportunities will be created.