Flat Tax, Simple Tax

On one of those awful cable news financial shows last weekend I saw a supply-sider making the argument that conservatives shouldn't support the idea of a VAT because it's too easy for politicians to raise VAT rates even if they start out low. That may well be correct, though I won't go into now. She then went on to argue that we ought to have a flat tax because it would make the tax code simple. Once upon a time, I was against the flat tax but accepted the CW that there's a tradeoff between simplicity and progressivity. Now that I've actually paid taxes, I'm baffled that any adult could possibly advance this argument.

What makes doing your taxes complicated is, very clearly, the part of the process where you need to calculate your taxable income. This is complicated, primarily, because we tax different kinds of income (dividends, interest, capital gains, wages, etc.) differently, and because the rules for things like business expenses and so forth are complicated. Once you have that figure calculating what you actually owe -- the part where having different brackets factors in -- is very simple. Of course it would be somewhat complicated to do this if you had to do it by hand, but a little computer assistance (TurboTax, say) makes it very simple. Computers can do division -- even complicated division -- very easily and automatically. What they can't do is calculate all your deductions and expenses for you. Those of us in the journalism trade tend to have a lot of miscellaneous income and a lot of small-bore business expenses that add up. It's complicated. There are things we can and should do to simplify the situation. But progressivity has nothing to do with it.

Indeed, if you want to talk about the relevance of the information age to policy, there's a strong case to be made that the brackets should be made more complicated, since we now have computers that can easily do the math for you. Instead of discrete brackets, we could have infinitessimal brackets, such that going from taxable income to taxes owed would require the use of calculus. In 1935 that would be totally unworkable, but in 2005 it would be no harder than implementing a flat tax. It's the deduction and unequal treatment of income that are the sole source of complexity and I would think this would be obvious to anyone who'd actually paid taxes. Perhaps TV pundits just hand stuff over to accountants and don't understand where the complexity comes from.

The oddest thing about this, really, is that this simplicity business isn't even what the supply-side case for a flat tax is. The case is supposed to be that progressive taxation leads to high marginal rates on high income earners, that this discourages high-earners from working longer hours, and that since high-earners have above-average productivity this has a disproportionately bad impact on national output. I don't think that's a compelling argument by any means, but it at least makes sense. Indeed, if you don't care about anything besides national output it may well even be correct. Instead we get this bogus simplicity spiel.