« Joe Klein and the Industrial Age | Main | Mmm...Semantics »

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.

March 7, 2005 | Permalink

TrackBack

TrackBack URL for this entry:
https://www.typepad.com/services/trackback/6a00d8345160fd69e200d83422992a53ef

Listed below are links to weblogs that reference Flat Tax, Simple Tax:

» Deflating the Flat Tax from UNCoRRELATED
What's up with the obsession with "simplicity" we hear about in terms of why a flat tax is an improvement? [Read More]

Tracked on Mar 8, 2005 8:36:13 PM

Comments

When I've pressed flat tax proponents on this issue, they immediately respond that the simplicity of the flat tax proposal isn't in the rates, it's in the removal of most deductions, and by taxing all income at the same rate. So the simplicity argument is, really, logically seperate from the progressivity one, and they simly conflate them because it makes for better talking points.

Oh, and even if you don't have Turbo Tax, calculating the tax owed is still trivial, because it's all done for you in tax tables. You just look up your income and read off the value.

Posted by: DT | Mar 7, 2005 5:16:46 PM

Except that it isn't. There is no evidence showing cahnges in labor habits due to changes in tax brackets.

Posted by: Rob | Mar 7, 2005 5:17:14 PM

Note also that people who make middle-class or lower incomes calculate the tax by looking it up on a chart in the back of the booklet. Don't even need any fancy software. The people who think flat taxes are simpler are obviously just too fancy to do their own taxes, or have off-the-chart incomes.

Posted by: Matt Weiner | Mar 7, 2005 5:17:41 PM

As DT and Matt Weiner point out, if you are doing your taxes by hand, you just look up your tax based on your taxable income in a table provided in the instruction booklet that goes up to some very high taxable income number. (At the end of the table, there is a little worksheet that walks you through the calculation if your taxable income exceeds that very high number.)

I do not know but strongly suspect that if you are using some sort of tax software, the software is programmed with the table, and doesn't actually perform any particular calculation unless your taxable income is high enough puts you in the worksheet category.

Posted by: alkali | Mar 7, 2005 5:21:06 PM

It's not just a question of the difficulty of figuring your taxes when you fill out your return, it's a question of being able to anticipate and understand how much you're paying and why (not to mention feeling that what you're paying is what other people like you are paying--and that you're not paying a lot more because you failed to take advantage obscure provisions). Yes, a computer program can quickly crank through an arcane obscure set of tax laws, but straightforward, transparent, human graspable tax laws are still a good idea.

Posted by: mw | Mar 7, 2005 5:32:54 PM

Except that it isn't. There is no evidence showing cahnges in labor habits due to changes in tax brackets.

This is really annoying. Who are you supposed to be disagreeing with?

Posted by: JP | Mar 7, 2005 5:42:01 PM

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.
This is the case? Aren't high income earners disproportionally overcompensated for their above-average productivity. Is Peyton Manning 100 times more productive than an Arena Football League quarterback? More than an AFL Super Bowl winning quarterback like Kurt Warner? Are American CEOs that much more productive than their Japanese or European counterparts? Their Chinese counterparts? Who are these people that quit working because their taxes are too high? Has anyone ever named them? Would a single one of them release their financial records so that their actual tax rate could be seen?
The local radio jock was going on last week about how consumption taxes would capture taxes from drug dealers who don't declare their income. Big whoop. What happens to the income tax revenue of their customers? The dealers are going to collect consumption taxes for the gov't.? The flat taxers just don't want to pay their share of the system, and they will try just as hard to avoid taxation under their new scheme.

Posted by: wolf | Mar 7, 2005 5:45:59 PM

I'd like to echo 'mw' since he beat me to the punch. The goal is not simplicity for the task of obtaining your refund, but rather simplicity for the sake of making optimal choices *beforehand*.

Posted by: Utter | Mar 7, 2005 5:47:06 PM

Oh, and even if you don't have Turbo Tax, calculating the tax owed is still trivial, because it's all done for you in tax tables. You just look up your income and read off the value.

As long as you have an AGI low enough to be set forth in the tax tables. Ahem.

Posted by: Al | Mar 7, 2005 5:58:55 PM

Well, I'm a flat tax proponent, so let me weigh in. There are always two sides of a flat tax: 1) getting rid of all deductions 2) getting rid of the progressive tax brackets. The first part is the only one that pertains to simplicity, but a television audience is typically not going to realize this.

The second one is more motivated by a different idea of fairness, plus the desire to get rid of strange oddities like bracket creep and the marriage penalty (or bonus, depending on your situation). As I see it, the only way to fairly treat both single and dual-income households is to have a single tax bracket. And while it doesn't really simplify filing, it does greatly simplify tax planning. After all, there's typically a great deal of uncertainty of which bracket you'll fall under and how many deductions you'll need to stay in the lower bracket.

As for income, most supply-siders also want to spur savings and investment, and thus would prefer to remove all taxes on dividends, capital gains, and interest. This obviously simplifies things even more. I am not a supply-sider (and I think the "double-taxation" argument is intentionally misleading), but I can see the point.

Posted by: fling93 | Mar 7, 2005 6:20:43 PM

Instead of discrete brackets, we could have infinitessimal brackets, such that going from taxable income to taxes owed would require the use of calculus.

I've wondered for some time now (http://leftcenterleft.typepad.com/blog/2004/11/tax_brackets.html) why we don't have a variable-tax (with a smooth slope) instead of discrete brackets. It would be a simple way of getting rid of those high marginal rates conservatives are going on about.

Posted by: Chris Cagle | Mar 7, 2005 6:45:53 PM

fling93 writes:

[T]here's typically a great deal of uncertainty of which bracket you'll fall under and how many deductions you'll need to stay in the lower bracket.

Note that the brackets apply only to marginal dollars: your first $X,000 of income is taxed at Y%, the next $Z,000 at W%, and so forth. It is not the case that as soon as you make one dollar over a certain threshold all the money you make will be taxed at a higher rate. That has not been so for almost 25 years now, but the myth holds on.

Posted by: alkali | Mar 7, 2005 6:57:07 PM

alkali: Note that the brackets apply only to marginal dollars: your first $X,000 of income is taxed at Y%, the next $Z,000 at W%, and so forth.

I was aware of that, and I didn't mean to overstate the degree it impacts your tax planning. But it still does.

Posted by: fling93 | Mar 7, 2005 7:02:09 PM

There is no evidence showing changes in labor habits due to changes in tax brackets.

Indeed. Last year I was told at work to take on as much overtime as I wanted since we were short-staffed.
At no time did I ever consider my taxes when deciding whether or not to stay longer or come in on Saturday. No matter that Fica + the IRS was eating up over a third of what I made I still knew I would come out ahead

Posted by: JonF | Mar 7, 2005 7:11:08 PM

There are additional sources of complexity such as the phase out of personal exemptions and deductions. These are in the tax code mainly to disguise how high the marginal rates actually are. While it is true that an income tax is necessarily complicated because the economic definition of income is complicated much of the complexity of the current tax is for special interest giveaways or to disguise what the tax code actually does.

It is bad for democracy if most people don't understand how their own taxes (much less anybody elses) are determined. Why don't we make the voting system more complicated while we are at it? Some sort of multiround ranked preference system with fractional votes which can only be counted by computer would be bound to be an improvement right?

Posted by: James B. Shearer | Mar 7, 2005 7:23:13 PM

I love how people claim there's no evidence for something without even looking for it.

Google "deadweight loss" "income tax" and see what you come up with. How about the first few articles that pop up...

http://www.ifs.org.uk/publications.php?publication_id=2001
or
http://www.nber.org/papers/w5055

If the posters would go peruse
http://www.amazon.com/exec/obidos/tg/detail/-/1402079923/qid=1110242632/sr=1-1/ref=sr_1_1/102-4082312-8558543?v=glance&s=books
they might comment in a more informed manner.

Posted by: DeadHorseBeater | Mar 7, 2005 7:45:52 PM

All you folks who want a simpler tax code listen up, I'm about to change your lives. You don't have to take any exemptions, deductions, credits, or subtractions fronm income. You want simple? Just fill in the income section. Make sure you get every dollar from every source.

Then go to the tax table. And there you are: the tax simplifier's utopia!

(Depending on how much you made, you might be obligated to do the AMT calculation. I can't imagine you'll have to pay more, though).


Wait, you don't like my utopia? You think maybe you might be paying more than the absolute minimum you have to pay? Hey I can't help it if you'd trade the beautiful simplicity of my utopia for saving some little money, but if it's really worth it to you go ahead. But really now, how 'bout we cut out the whining.

Shorter: all complexity is about avoidance. There will be complexities that create avoidances for as long as the tax code is a human creation.

And any people who are actually deciding what actions to take based on tax consequences -- other than the decision to buy rather than rent a home -- are living in a world of such complexity already that no changes in the tax code are going to make a real difference in your life.

Shorter 2: It's easy enough to tell the difference between reasons and excuses, and nothing I've ever heard from the flat tax crowd falls into the former category.

Posted by: CharleyCarp | Mar 7, 2005 10:01:06 PM


How about a walleye tax? To tax walleye fishing might offer a way to wiggle out of the deficit net.

Posted by: abdul abulbul amir | Mar 7, 2005 10:20:52 PM

As I see it, the only way to fairly treat both single and dual-income households is to have a single tax bracket. And while it doesn't really simplify filing, it does greatly simplify tax planning. After all, there's typically a great deal of uncertainty of which bracket you'll fall under and how many deductions you'll need to stay in the lower bracket.

Well, while I'm generally in agreement with Fling93's sentiments, there is another way one could do away with any fairness isssues involving the married vs. single issue, and that is to stop taxing the income of married couple households, in favor of individuals. Under such a system, the income produced by jointly owned financial assets could be split 50-50 for tax purposes (or indeed the law could even allow for 0-100 splits in a multiple tax bracket regime, with the couple assigning the nought and the 100 in a manner consistent with the lowest possible tax bill). The same thing could be done with kids: either one parent takes the full deduction, or the parents split the value.

Posted by: P. B. Almeida | Mar 7, 2005 10:36:17 PM

Back in the day, I could calculate my taxes with a really simple spreadsheet where I'd make a few simple changes each year.

These days, you have to buy a new copy of TurboTax every year just to keep up with the myriad of changes congress makes every year. I don't think anyone with capital gains income can calculate this stuff by hand any more. It's gotten so complicated you really can't do without the built in expert system of tax software.

Bush has added 10,000 pages to the tax code with his tax-plan a year program. We could cut national compliance costs simply by freezing the tax code for two years at a time, cutting accountant's workloads by half.

Posted by: Buckaroo | Mar 7, 2005 10:36:54 PM

Several of the posters above are arguing that there should be a flat tax based on a personal income tax form. You need to consider how business income is calculated instead. If the system is very simple, people who want to avoid taxes will simply create a "business", hire themselves, buy everything they want in the business, call those purchases "business expenses", and pay themselves the minimum wage. Of course this can't be done now because there are complex rules about what constitutes a business expense, what you have to count as in-kind compensation, etc. Matt is exactly right. Once you have agreed about what to count as income and labelled it, the rest is very simple.

Posted by: cafl | Mar 7, 2005 10:44:43 PM

CharlieCarp: You want simple? Just fill in the income section. Make sure you get every dollar from every source. Then go to the tax table. ... But really now, how 'bout we cut out the whining.

I use TurboTax like everybody else, and since I have a mortgage, it's worth my while to itemize. Under a flat tax, nobody would have deductions, so you could lower the tax rate for everybody without lowering federal receipts. This way, you wouldn't have to choose between simplicity and a lower tax bill (no, it probably wouldn't be as low as Steve Forbes claimed).

In addition, I don't believe in using the tax code to legislate behavior or reward campaign contributors or transfer wealth from renters to owners or what-have-you. I know most libertarians want to scrap the whole income tax altogether, but I would be perfectly happy with a tax code that sticks to its purpose and just raises revenues and nothing else.

I'm not whining. I just think the system can and should be improved. Indeed, I would probably be financially worse off without the mortgage deduction. In addition, I'm married and my wife doesn't make very much money, so we're probably better off with the progressive tax brackets as well (it's only a marriage penalty if you have two comparable incomes). So I don't know how you could call me a whiner -- at least in this case, anyway.

Posted by: fling93 | Mar 7, 2005 11:21:47 PM

I don't think anyone with capital gains income can calculate this stuff by hand any more. It's gotten so complicated you really can't do without the built in expert system of tax software.

Capital gains remain a rather simple calculation and expert systems are hardly needed to calculate them. Unless, the distinction between short and long term gains has suddenly become more difficult than sonsulting a calemdar and a simple schedule of tax rates for the long term gains.

As to MY's points on complexity, he is projecting his own income structure onto a population that largely needs nothing more than a W-2 to calculate their taxes. I'm no fan of a flat tax and a VAT seens to be even worse. As has been mentioned, most deductions are phased out before many Americans can take advantage of them. This may be a problem, but hardly a compelling argument for an overhaul with the scope of the flat tax.

Posted by: Publius Rex | Mar 8, 2005 12:12:30 AM

fling93 writes:

"As for income, most supply-siders also want to spur savings and investment, and thus would prefer to remove all taxes on dividends, capital gains, and interest. This obviously simplifies things even more."

Uh, no. Treating different types of income differently doesn't simplify taxes, it complicates them. Wealthy and upper-middle-class taxpayers will hire lawyers, accountants, etc., to create ways to turn otherwise taxable income into "dividends, capital gains, and interest". This will either be a screw-the-rest-of-us scandal or will result in rules and regulations about what is "really" a "dividend", a "capital gain", etc.

When the arguments of the flat taxers are critically examined, they fall of their own weight.

Posted by: Civil-rights Lawyer | Mar 8, 2005 12:39:00 AM

Some years ago I wrote an op-ed piece for our local paper where I suggested that we divide up our current tax system into two separate systems: one a tax system, and the other called the "Office of Giving Money Away."

The tax form would be three lines with no deductions or credits for having children, owning a home, paying alimony, and so forth.

And people who wanted money for having 10 children, owning a palace with a million dollar mortgage, or paying $100,000 a year in alimony, would apply for government money and receive a check.

The idea was obviously for fun, but the object lesson is real: how long do you think the current tax system would last if average people realized that renters get nothing, homeowners with mortgages of less than $100,000 might save a few hundred bucks, and people with $10 million homes save tens of thousands on their taxes?

If the government wrote wealthy people a check for $50,000 every year and gave nothing to poor renters, the system would collapse overnight. Instead, the current system festers on because the grossly unfair disparities are effectively hidden from view.

Posted by: James Finkelstein | Mar 8, 2005 1:54:22 AM

The comments to this entry are closed.