Squaring the Culture




"...and I will make justice the plumb line, and righteousness the level;
then hail will sweep away the refuge of lies,
and the waters will overflow the secret place."
Isaiah 28:17

02/03/2009 (2:26 pm)

Death By Tax Flub, Take Three

Today Nancy Killefer, Barack Obama’s choice for “performance czar,” withdrew her name from consideration because in 2005, the District of Columbia placed a tax lien on her home due to her failure to pay withholding taxes on wages paid to her domestic help.

This marks the third candidate for Obama’s cabinet who’s been marred by personal tax problems. Her choice to withdraw herself from consideration makes Tom Daschle’s continued bid for HHS Secretary look problematic, especially given the difference between their problems; she missed paying roughly $300 in withholding taxes, plus interest and penalties, whereas Daschle had to make up more than $140,000 in back taxes. These occur after the embarrassment of proposing for Treasury Secretary a man who had to make up $25,000 in back taxes in order to conform to the law.

While all of this appropriately damages Obama’s claim to represent a return to ethical government, I think it provides evidence for a much more relevant trial. The fact is, the US tax code has become so onerous that even the most affluent and best-educated among us struggle to keep up with it. It’s long past time to change it.

Timothy Geithner arguably cheated on his taxes, and tried to game the system. Tom Daschle apparently made some aggressive mistakes as well, resulting in an overdue tax bill many times the size of most peoples’ incomes. Rich Lowry appropriately takes both to task for their sins today. Morally speaking, we should be a lot less exercised about Ms. Killefer’s under-the-table cash payments (which are, frankly, a lot more common in the US economy than we’d like to think.) But it’s likely that none of these would be a significant problem if we instituted a simple flat tax system.

Complexity is just one of the problems with the US tax code. Because it’s so complex, it creates a dizzying array of counterproductive incentives and double taxes, discouraging savings and investment and creating a multi-billion-dollar-a-year tax accounting industry just to help companies and wealthy individuals minimize their tax burden — billions that are therefore not available to boost productivity. All our economic activity, from employment choices to major purchases to business risks, is conducted under ponderous concerns regarding how it will affect our taxes. The tax code is a constant brake on economic growth. Also, ultimately, it potentially makes minor criminals of us all simply because we’re bound at some point to screw up.

A flat tax would not only solve the complexity, it would solve all the negative incentives as well. Tax day would become a simple exercise for everybody. Government tax processing costs would shrink. Business tax management costs would disappear. It would be as though the economy had an elephant removed from its back, and could stand upright. Flat tax proposals have revitalized economies all over eastern Europe, and would certainly help revitalize our own economy at a time when it’s needed.

A number of conservatives seem to favor what they call a “fair tax,” or a national sales tax, over a flat tax. The difference is minor in principle. Any tax that does not penalize savings is considered a consumption-based tax: a national sales tax is a single consumption-based tax that occurs when the money is spent, whereas a flat tax is a single consumption-based tax that occurs when the money is earned. They have the same economic effect. The flat income tax, however, turns out to be much, much simpler to implement, and much simpler to enforce.

Here’s a link to a good, general article from the Heritage Foundation discussing flat tax proposals in general. The surprise appearance of a number of tax cheats in the new President’s cabinet gives us an opportunity to make the case for a simpler tax system at a time when the economy could really use the boost.

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3 Comments »

February 5, 2009 @ 4:46 am #

Phil,

A flat tax is not simpler than a progressive tax. The complexities of our tax code lie in its impurities (exemptions, deductions, and credits) not in its progressivity (which is built into the tax tables).

A “pure” progressive tax (a tax code without exemptions, deductions, and credits) would be just as simple as a “pure” flat tax. Conversely, an impure progressive tax will be just as complicated as an equally impure flat tax.

Flatness of the tax rates contributes nothing to simplicity.

For the record, I’m not convinced that a flat tax is fairer than a progressive tax. However, that’s at least debatable. The idea that the flat tax is simpler than a progressive tax is clearly wrong.

Best wishes,

Joe

February 5, 2009 @ 10:24 am #

Joe,

Logically and theoretically, you are correct, so I’ll concede the point. However, the family of proposed flat tax schemes of which I’m speaking is far simpler that the existing tax scheme. If you’ll read the article I linked to, you’ll see what I mean. The single tax form required to implement the scheme is literally the size of a large business card.

Here’s the image they supply. Click on it to enlarge it:

I suppose the objection is that Congress will immediately leap on any proposed simple scheme like this and fill it with exceptions for their pet causes. That’s probably true to a point and would require activism to quench, but at least the starting point of the new scheme would be dramatically simpler than what it’s replacing.

PS, what are you doing up so late? 1:45 AM west coast time?

February 8, 2009 @ 2:53 am #

Phil,

It was only 11:45 p.m. Hawaii time.

I don’t deny that the flat tax proposals under consideration are simpler than our current progressive system. But the implicit suggestion of your argument was that these proposals are simpler by virtue of their flat tax rates rates (in comparison to our current progressive rates). To the contrary, they are simpler only because they include fewer impurities. A pure progressive system would be just as simple.

Joe H.

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