Last week, during a conversation among a group of people at the gym about taxes, someone turned to me and said, "OK, expert, wouldn't the flat tax solve all these problems?" My answer came in a sentence as short as I can make one. "No," I replied. "Why not?" was the rejoinder.

Why does a flat tax not make tax simple? A flat tax, that is, a tax imposed at a flat rate rather than multiple rates, makes the computation of tax liability easier, but that computation contributes little to the complexity of the tax law because once taxable income has been computed, the tax liability can be found in a table or generated by tax software. It is the computation of taxable income that is complicated, and playing with the tax rates does nothing to alleviate that complexity. A flat tax does not make any simpler the complex rules that determine what receipts are included in gross income, and thus taxed, and what receipts are not. A flat tax does not reduce the complexity in the numerous provisions that allow deductions and that impose limitations on otherwise allowable deductions. A flat tax does nothing about the impact of money's time value, which generally encourages attempts to delay income and accelerate deductions. All of the statutory, regulatory, administrative, and similar provisions, and all of the case law, dealing with these timing issues would be no less voluminous nor any less complicated.

The phrase "flat tax" makes for a nice soundbite. It serves well those politicians who seek votes by misrepresenting the impact of a flat tax, trying to sell it as a solution to a genuine problem when, in fact, it is at best the equivalent of using touch-up paint on an automobile that has been totaled in a wreck. What goes unsaid is what some mean by the phrase "flat tax," namely, a flat rate tax on wage and salary income. Yes, that would be a much simpler system, though not without complications. Think of the game by which investment bankers use partnerships to convert compensation for personal services into capital gains taxed at special lower rates. Worse, it would shift the burden of taxation even more heavily onto workers and give investors a free pass. The fact that something is simpler is insufficient to make it the chosen path to simplification. Have you seen the joke Form 1040 with two lines? The first one asks what the person received. The second one instructs the person to "send it in." Simple? Yes. Good policy? No.

The federal income tax can be simplified greatly without shifting the tax burden solely onto workers. All that needs to be done is to remove the special interest giveaways and the government grant programs that are hidden in the tax code but should be restructured as expenditures administered by the appropriate federal agency, where the nation can see them for what they are. Ultimately, a simpler tax system requires a less tainted political system. That's a choice for citizens to make, but will they ever get the opportunity?
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