Many things are predictable this time of the year. Earlier commercial appeals to our Christmastime splurges, twilight that sets in seemingly when lunch is over, and proposals for a flat tax, such as we now have from both Herman Cain and Rick Perry.
Actually, three out of every four years, we’re spared the last. For that we should count our blessings.
But truth be told, a flat tax has much to recommend it. If designed right, it would make paying taxes as difficult as paying property taxes. For anyone who itemizes their taxes, that’s a big advantage. As a nation, we spend hundreds of billions of dollars each year simply complying with our income tax laws. With a flat tax, a bill would come. You’d pay it. You wouldn’t even need a calculator, let alone H&R Block.
The problem with a flat tax, though, is that proverbial devil lurking in the detail. But it’s more than the detail that is problematic. It’s also the claim that flat is fairer.
On that devil: The biggest advantage to a flat tax is that it can be simple. The simplest flat tax would tax all income, however earned, at the same rate. If we did that, a tax of about 11 percent would raise as much money as does our current income tax – which instead relies on marginal rates of 0, 15, 25, 28 and 35 percent.
Eleven percent sounds pretty low and maybe not even that painful – especially when you figure in your pain from the look you receive when handing over your perfectly organized but completely incomprehensible file of “receipts” to your H&R agent.
A quick evaluation of anyone’s proposal for a flat tax, then, is how far it deviates from this simple-as-it-gets 11 percent solution. Cain’s 9-9-9 proposal isn’t all that simple. His 9 percent tax on income excludes a number of things from taxation – enough that too many of us would still need to file taxes. So erase that postcard-in-the-mail image from your mind. Plus, to make up that lost revenue, Cain needs to add in a national sales tax.
Perry’s proposal is better, but still not great. He’s proposing a 20 percent flat tax. The fact that the tax is almost twice the 11 percent benchmark tells you he’s excluding lots of income from taxation. In Perry’s case, this includes a $12,500 standard deduction for every person, which is nice insofar as it allows many to not pay any income tax.
But Perry’s proposal exempts lots of capital income; like Cain, his plan is more a wage tax than an income tax. And he retains many of the current deductions. The more you include exceptions and deductions, the weaker is the case for switching from our current byzantine income tax to another. Once the postcard image disappears, so does flat tax’s justification.
The real problem with a flat tax, though, is the premise that it’s fair. Those who argue that it is fairer like the fact that Bill Gates, my doctor and the person who rings up my groceries all give up the same percent to the federal government. But this isn’t fair for two reasons. The most obvious is that a fixed percent of Bill Gates’ income means little to him. That same percent to a checkout clerk means a lot.
More importantly, we don’t live in the meritocratic society we’d like to imagine, one where anyone could become Bill Gates or a doctor. If we did, we’d see that those in the top income tiers came from all walks of life, as would those at the bottom. Instead we see that three-quarters of those who are born rich (into families making more than $100,000) wind up rich themselves.
Among the poor, almost half remain poor as adults, and only about one in 13 “strikes it rich” by making more than $100,000. With rising income inequality, lack of social mobility is especially unfair. As long as the decks are stacked for and against so many, a flat tax may be simpler, but it’s hard to say it is fairer.
An income tax that put H&R out of business would be one to celebrate. But we can’t count on either Cain or Perry to do that. Nor can we count on either to give us a fairer tax system.
Katie Baird is an associate professor of economics at the University of Washington Tacoma. Email her at kebaird@uw.edu.
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