Fixing the Tax Code Will Not Be Easy

The flat tax proposals that are currently being circulated have great appeal to some. According to flat tax advocates not only would a flat tax be fair, it would simplify the nearly impossible to comprehend tax system currently in place. It would be fair in that everyone pay the same rate. But it is a peculiar sense of fairness that drives the idea. Many would miss 20% (or whatever the final rate would be) of their income far more than than others would. At 20%, if you make $1,000,00 you are left with $800,000. You can live pretty easy on that. If you make $50,000 you are left with $40,000. The guy making $50,000 will miss that $10,000 a lot more than the rich guy would miss that $200,000. That is the problem with a flat tax. Even if that flat tax is adjusted by income bracket, depending on how large the brackets were, inequity would remain. An 8% tax rate would be felt more keenly by a person making $35,000 a year than a 10% tax on someone making $50,000.The same with sales taxes. Wealthy people have no trouble paying and extra eight or ten percent on a purchase. If you are middle class and out shopping to get your kids new clothes, that eight or ten percent can really hurt. As it stands, rich people pay more in taxes, in principle any way, because they can afford to do so.

A concise, simple, and streamlined graduated income tax would increase revenue while maintaining  fairness, depending on how you define "fair". Some people do not think it is fair to pay more in taxes simply because they have a lot of money. But, then again, "a lot of money" is a matter of perspective too. I think $75,000 a year would be a lot of money. To some people, that is a pauper's wage.

Much more radical than simply flattening tax rates are the proposals to get rid of, or at least radically curtail tax deductions and exemptions, sometimes referred to as "loopholes". Gone would be all the back alleys in the tax code through which clever and motivated people navigate in order to reduce, and sometimes avoid completely, their tax burden. If you make $100, 000 in a year and your tax rate is 25% you pay $25,000. That certainly seems fair but in reality it isn't. A single person renting an apartment with no children making $75,000 can live well. The head of a household with four children making $75,000 a year, not so well. Tax deductions are simply one way to try and even things out. That, is sometimes equated with fairness.

The flat tax idea is heralded as a plain and simple approach to the U.S. tax code. But government, like life, is never plain and simple except, perhaps, to the plain and simple. Government influences both the economy and society through a byzantine array of financial incentives, write offs, and penalties. On activities or behaviors it wants to encourage it bestows tax breaks and write offs. If the government wants to encourage investment it lowers the capital gains tax. If it wants to encourage college education it allows individuals to write off college related expenses. If it wants to encourage consumption, it lowers the sales tax rates. If it wants to encourage home ownership it allows mortgage deductions. Tax codes contain a laundry list of such items to encourage activity government desires and discourage activities it disapproves of. To rid the tax code of breaks, or incentives if you prefer, would hinder the federal government's ability to manipulate economic activity. Gone would be write offs for getting rid of old, inefficient machinery or automobiles. Gone would be write offs for college education. Gone would be deductions for making your house more energy efficient.

Certainly there is much in the tax code that can be adjusted. How could there not be? That is what politics is for. What those adjustments should be is what elections are for. To rid the federal tax code of all breaks, deductions, and penalties would be a large blow to the government's ability to direct and manipulate the economy and, indeed, life in the U.S. Perhaps that is the real goal. If that is the goal, the idea has merit. If the goal is fairness, the flat tax idea needs a lot of work.

There is an allure to a simple and easily understandable tax system. Many envision a day when the average person will be able, and willing, to sit down at home and figure out their taxes with a calculator. It is difficult to envision that day ever arriving. For that day to happen Washington will have to resist the temptation to manipulate the tax code. Odds are no one will ever see that day either. For to give up the power to manipulate the tax code would be to give up one of the government's best tools to manipulate society and garner favor. Then there is always the matter of what is "fair". If there is a definition of "fair" that can last for more than two years in Washington, that would be remarkable.