Is the Flat Tax All They Can Come Up With?

What better time for reform than when a nation finds that the ship of state has run aground, when we are wracked by joblessness and foreclosures, when 69% of the public in a recent poll says the U.S. is in decline (only 15% thought not).

Not much can be done to right the economy in the short term, and Congress is seeing to it that not even that is done, so why not at least get to work laying the groundwork for a healthier future while waiting hopefully for the economy to recuperate.

There is much to reform, but the tax system, which underpins so much else, is where to start. Unfortunately, those in the White House and Congress, the ones who are in a position to do something about revolutionizing the tax code, are stuck in permanent neutral. All the action comes from the Republican candidates who are vying to be the one to take the keys from Obama.

But what do we get? The resurrection of the flat tax, that irrepressible scheme for the rich getting richer that masquerades as crowd-pleasing simplification.

First came Herman Cain's peculiar 9-9-9 plan, which would drop the maximum tax on the wealthiest to 18% (one of the 9% is for corporations). Less than 18%, actually, because another of the 9%s is a national sales tax, which would add a second large regressive tax to the social security payroll tax. It is regressive because, while lower income folks spend all their income on taxed goods and services, the rich do not. The more the wealth, the less of their income is spent on consumption, the less that is subject to Cain's sales tax.

To compete, Rick Perry was coached by twice-failed presidential candidate Steve Forbes, who campaigned on the flat tax in 1996 and 2000. Perry came forth with a more elaborate plan, a mixture designed to please middle class folks while slipping in his own flat tax to keep those campaign contributions flowing from the wealthy. His plan — a tax cap, really — chops no less than four brackets from the current tax schedule by making the maximum tax rate 20%.

Households making less than $500,000 would have the option of continuing to use the current tax schedule, which we can only view as a ruse to make the 20% seem to pertain to only a few. In fact, anyone making $145,000 or more of taxable income would go for the 20% rate. That's where the the current tax schedule crosses the 20% threshold. Millions would pay less. Someone with taxable income of $1 million would pay $120,000 less. Above that the savings really soar.

Into the trash would go the elephantine tax code — 72,000 pages Perry tells us — with your tax return reduced to the postcard he pulls from his pocket. Never mind that he just added a new layer which will cause us to compute our taxes two ways — three, if the unmentioned alternative minimum tax didn't make it to the Perry dustbin.

For that under-$500,000 group, Perry would do away with the estate tax and taxes on dividends and capital gains while retaining deductions for mortgage interest, state and local taxes and gifts to charity. He would even boost the birth rate by handing out a $12,500 exemption for every member of a family.

Incredibly, in announcing a tax plan with these features that would hugely reduce government revenues — a low maximum tax rate at one end and even fatter deductions at the other — Perry said "America is under a crushing burden of debt". So let's make it worse?

Government revenues, currently at just 14.8% of gross domestic product, are the lowest in about 50 years. Whereas conservatives want to reduce the size of government by cutting its funding — the "starve the beast" strategy — Perry's plan would speed the process by strangling it.

How about Mitt Romney? Is he likely to wedge a flat tax feature into his 59-point plan in order to compete? Even he, whose views adapt to whatever fits the moment, would have difficulty pulling that off, having years ago called the flat tax "a tax cut for fat cats".

but it will be so much simpler The promise of simplification has always been the lure that flat tax crusaders use to seduce a public that was driven years ago to use tax software, a tax service, or an accountant to avoid the tax code’s thickets of complexity. It’s been so long since people have been near the 179-page (and that’s without forms) 1040 instruction booklet that they are unaware that the tax rate schedule is simple — just a few lines long (and only one of those lines pertains to you).

That schedule has no need of flattening. It’s the page after page of worksheets in the instructions, with their inscrutable step-by-step calculations, their barnacles of special exemptions, exceptions and dependencies on other calculations that are the cause of the complexity. (And don’t blame the IRS. These tangles are the mare’s nest handed to the revenooers by the folks we sent to Congress, who tacked some amendment to some bill to pay off some campaign contributor and left it to the hapless IRS to figure out how to express the math.)

what happened to tax reform, mr. president?

But what about actual tax reform by those who pull the levers?

In all three state of the union addresses President Obama has spoken of tax reform to some degree, and most forcibly in the most recent address. Along with a rising chorus on both sides of the aisle in Congress, he has come to agree that the corporate tax rate, at 35% the highest in the world, drives businesses offshore and jobs along with them.

”So tonight, I'm asking Democrats and Republicans to simplify the system. Get rid of the loopholes. Level the playing field. And use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit. It can be done.”

About individual taxes he said,

“The best thing we could do on taxes for all Americans is to simplify the individual tax code”.

That was January. It’s nearing year-end.

Instead of doing anything that fits his job description, Mr. Obama is instead touring the country campaigning to raise money over a year before the election. His vice-president isn’t on the job either. On MSNBC’s “Morning Joe”, Biden said his main job for the next year is to do everything he can to assist Obama to get re-elected.

Republicans in Congress have shown that they will block anything proposed by Obama in order to make him a failed president and are unperturbed that their roadblock to progress — with all movement stalled for yet another year — has won them the approval rating of bedbugs, as the Times’ Bill Keller put it.

strike while the economy is cold

If Obama would like to linger in the Oval Office, sending popular proposals to Congress to be struck down is actually a strategy for re-election. Presidents and their advisers, in the cocoon of D.C., have a strange belief that such setbacks are embarrassments —proof of weakness in the public’s eye. In fact, every “defeat” gives Obama a brush with which to tar Republicans as obstructionists out on the campaign trail, while at the same time giving an assist to Congressional candidates from his own party.

As for Republicans in Congress, it’s a wonder they have not advanced bills on their own so as to claim all credit for fixing what is broken. They express a strong wish to reduce the corporate tax rate in return for eliminating loopholes, yet nothing moves forward. Of course, so few large corporations pay anything close to the 35% rate, that we are left to wonder whether Congress is hearing from these campaign donors that they like things just as they are.

And so, while the right moment is at hand for a sensible, thoughtful approach to tax reform that solves some of the inequities in the system, the sort of reform that presidents and politicians have spoken of doing since forever ago, we get flat out gimcrack and gimmickry.