Why a Flat Tax Will Never Get Off the Ground
The "File Your Taxes on a Postcard" Dream Has Never Stood a Chance
Thanks again to American Thinker for running this piece. You can visit the website at: https://www.americanthinker.com/
Every few years the idea of a flat income tax – a tax you could fill out on a postcard – is floated either in DC or in various state houses (except of course the state’s that are growing massively now because they have no income tax.)
It would seem to make sense and be fair. No (or very very few) deductions and a simple rate (or maybe two or three at the most) for everyone; do a simple math problem and done – easy, peasy.
The concepts are even usually discussed as being cost neutral – you pay (net) $1 now, you still pay (net) $1 except its easier and more understandable, saving taxpayers time and – because everyone could do their taxes themselves – actually would come out a bit cheaper.
So why do these ideas die quiet unceremonious deaths each and every time they come up?
Two reasons – power and money (everything always seems to come down to those two things…sigh.)
As to the money, oddly, it really doesn’t involve the government having to give up all that much – remember, the simple tax concepts floated are usually revenue neutral - so it’s not that.
It’s about jobs; specifically good middle-class jobs.
One part of the government would see a cut, obviously, and that would be the IRS itself, which currently has about 100,000 (not including Biden’s new 87,000) employees. Everyone other government worker spends – pretty much only the IRS collects it and that means that department would face severe cuts (or at least should.)
IRS jobs are well paying and have good benefits – they are solid, reliable middle/upper-middle class jobs.
Tax preparer jobs – there are about 90,000 of those nationwide – would also be practically eliminated overnight. Again, they tend to offer a solid middle-class lifestyle.
And then there are tens of thousands of accountants and lawyers and business bookkeepers and software companies – again, good to very very good jobs - that rely on the complexity of the tax code for their very existence.
The country spends about $15 billion just on regular consumer tax preparation services, untold billions for lawyers and accountants, about $14 billion on the IRS itself, and about 3 billion hours of its time doing its taxes.
In other words, simplifying the tax code would gouge a huge hole in the middle class, with somewhere around 300,000 jobs made obsolete overnight, and set off a terrible general national economic crisis. Financial worker associations lobby, um, vigorously against any changes and when politicians think through the consequences they begin to go pale. It is understandable – to an extent – to be worried about voting for something that would put so many lawyers out of business.
As to the power, that part is even more difficult to get around for “flat taxers.”
State and federal tax codes are complicated on purpose, and not just because of the legalese and sub-appendices and charts and diagrams and the “refer to line 22 of form R-375(b) unless your cousin can claim you as an educational expense then go back to line 18-f of form S-45 and copy that percentage result into line 84, subset (g) of schedule M, only if you can provide the name of the nurse who attended your birth…” instructions.
No – the complexity is driven by the power the tax code offers. For example, being able to consider health care costs as “pre-tax” income was the work of Henry Kaiser during WWII. Kaiser was having trouble competing for workers to build Liberty ships so he offered free health care (a first as well, actually, and the birth of Kaiser-Permanente) and convinced the feds to make it pre-tax, which was a big deal as the tax rates then ranged from 10 to 94 percent. 10% may seem nice now, but until the war only about 7% of people paid any income taxes at all; by mid-war that number had risen to about two-thirds, so pre-tax earnings became far more important.
This is just one (of a zillion) example how a complex tax code can be used as a tool to manipulate finances in order to advance a policy or program in a way that may or may not have to be approved by the legislature. In other words, seemingly small “language” changes and/or interpretations that can be made by “staff” can have very outsized impacts.
Of course, politicians can be and sometimes are upfront about using the tax code to modify behavior. Want to push solar? Tax breaks. Want people to drive electric cars? Tax breaks. Want you city to be the new home of a semi-conductor factory? Tax breaks. The list is practically endless and can be added to – or, more importantly, subtracted from – at any time for whatever reason.
Then there are the personal advantages of the complexity for government officials - a staffer interprets a code in a way that is advantageous to company X then finds herself hired at company X for a lot more money.
And, of course, there are the skeevier electeds. Donor Y needs a break? No problem. Friend X is worried about maybe not having followed the law precisely? Take care of it. Some industry group runs a nasty campaign ad against you? Vengeance is filed in triplicate via the tax code.
The tax code is one big grey area and grey areas are prime real estate for those of a mind to take advantage.
And that’s why the very very good idea of a simple tax never gets beyond the bumper sticker phase.