We all hate paying taxes. Most of us hate filling out tax forms even more. The complexity of the tax code is loathsome to the point where many of us pay hundreds of dollars to a CPA or tax preparer to do it for us. Thus, one of the most appealing pitches to voters during campaign season (aka “the silly season”) is the promise of lower taxes and simpler rules.
Don’t be a goat! The GOP tax schemes are BS. This snake oil is in full flower this campaign season. Nearly all the current crop of GOP presidential contenders are pitching some kind of flat tax. This isn’t a new idea; it’s a longstanding old idea, peddled by a parade of failed GOP candidates over the years. (Steve Forbes immediately comes to mind.) The most creative of its current incarnations is Dr. Ben Carson’s concept of doing away with taxation altogether, and supporting government with a system of tithing. This isn’t new, either; in fact, it’s medieval, harking back to the Middle Ages when Popes employed armies to make sure people tithed to Rome.
There are lot of things wrong with the flat tax idea. The most obvious is that, right upfront, it gives the rich a huge tax cut at the expense of middle and working class taxpayers. As a CNBC article published today explains,
“It’s such a simple idea: A single tax rate for individuals, rich and poor, and companies, big and small. ‘Everybody should pay the same proportion of what they make,’ said Republican presidential hopeful Ben Carson in Tuesday’s latest candidate debate. ‘You make $10 billion, you pay a billion. You make $10, you pay one.’ But like everything else in the sprawling, $18 trillion U.S. economy, the math isn’t quite that simple. And, while the idea is hardly new, the current round of proposals simply don’t add up. Aside from their obvious simplicity, the latest flat tax proposals are being pitched as a broad tax cut for the middle class. But, in fact, most Americans would end up paying a greater share of their income — except the very rich.”
For another thing, all of the schemes proposed by this generation of GOP candidates would blow a huge hole in federal revenues; so much for claims that Republicans are against deficit spending and massive federal debt. This, of course, is exactly what happened under the last two tax-cutting GOP presidents, Reagan and Bush43, who between them racked up nearly half of the total federal debt accumulated over the last 235 years. (Note: In their world, deficits are bad only when Democrats do it.)
But there are other things wrong with flat tax rates and simplified tax codes, too. For starters, they treat everyone alike, but people’s circumstances are sharply different. Why should a family with high medical expenses due to a sick child pay the same taxes as a family with the same income but not burdened by those health care expenses? The first family is much less able to pay taxes than the second family, so it makes sense to give them a medical deduction.
Another thing to watch out for is that the mortgage interest and other common deductions that benefit middle class families would disappear under many of these schemes. Thus, a young family starting out, and struggling to make mortgage payments, would be socked with the same tax bill as an older couple with equivalent income but living in a paid-for house. The latter household, with its much lower living expenses (other things being equal), can afford to pay more taxes.
The existing tax code, on paper, is progressive (i.e., taxes the rich more) at least in terms of the rate structure, although it’s pretty questionable just how progressive it actually is, because the rich get all sorts of writeoffs, income exclusions, business deductions, and tax credits not available to the rest of us. Some millionaires pay no taxes at all, which certainly isn’t progressive taxation in any realistic sense. The general public, of course, is aware of this — and rightwing politicians exploit their anger by promising to “simplify” the tax code in ways that pander to the rich and shift tax burdens from the wealthy to the working class even more. It sounds good to the victims, but it isn’t fair.
There are actually legitimate justifications for a progressive federal tax system. The obvious one is that the rich can more easily afford to contribute to government costs than a working class family struggling to make ends mean. Another argument is that the rich get more benefits from government spending, ranging from defense spending (they benefit more from this because they have more to protect), to transportation infrastructure that moves goods and workers, to the numerous direct and indirect subsidies that farmers and business owners get. Still another justification is that state and local taxes tend to be regressive, and progressive federal taxation helps offset this somewhat. (Total taxation breaks down to roughly two-thirds federal and one-third state and local.)
The most pernicious of the conservative tax “reform” schemes replace the income tax altogether with some form of national sales tax, although they don’t call it that; it’s disguised with terms like “value added taxes” (which creates the false illusion that it’s paid by businesses, when in fact it’s paid by consumers) and “fair tax,” which would impose an approximately 30% federal sales tax on top of existing state and local sales taxes. Any kind of sales tax scheme is highly regressive, and has the effect of shifting the tax burden from the wealthy to the lower income groups, because the wealthy invest a much larger percentage of their income and spend much less proportionately on consumption.
And, by the way, a 30% federal sales tax rate isn’t revenue-neutral; it, like a 10% or 15% flat-rate income tax, would either require massive spending cuts or cause massive deficits. A revenue-neutral VAT or “fair tax” rate would have to be at least 40% to avoid this; when combined with local sales taxes, which are high single digits and approach 10% in some places, consumers would be faced with a 50% sales tax on their purchases in exchange for eliminating payroll deductions and not filling out 1040 forms anymore. I wonder how many voters would sign up for that if they knew what the real numbers are, and if they understood that they would be paying for a huge tax cut for the 1-percenters?
But let’s suppose the GOP “reformers” don’t push that far, and stick with tax code simplification and rate reduction. These schemes typically are pitched to voters with the siren song of simplicity: You’ll be able to file your tax return on a postcard, they say, and the entire tax code will be only 3 pages long. It’s a pipe dream. Just defining “income” takes more space than that.
This reminds me of one of my more embarrassing moments in law school. One bright autumn day, I tried to sneak into my tax class 10 minutes after the bell. It was early in the term, so we were still slogging through basics, and the topic this day defining “income” for federal income tax purposes. Law professors love to pick on students who skip class, sneak in late, haven’t read the assigned material, or are unprepared — it’s a subtle form of academic discipline. About three seconds after I quietly eased through the door and slunk into an inconspicuous seat in the rear of the classroom (a standard and widely used law student tactic), the professor loudly called out, “Mr. Rabbit! Tell us what ‘income’ is.”
Caught unprepared, I squeaked, “Everything that comes in?” The class instantly erupted in uproarious, sustained laughter, while the professor stood stern and unmoving behind his lectern, trying to suppress a gargantuan self-satisfied smirk. Utterly clueless, and more than a little curious, after class I asked a classmate with whom I was on friendly terms, “What was so goddamned funny?” He explained, “Just before you came in, he told the class, ‘Just wait, some idiot will say ‘income’ is ‘everything that comes in.'”
Well, it isn’t, and I was the goat that day. “Everything that comes in” includes a lot of things that aren’t — and shouldn’t be — taxable income, such as income that’s already been taxed, and also there are a lot of income exclusions for very good reasons. So you need to define taxable income, and because we live in a complicated world, it’s a complicated definition. You can’t do this in 3 pages. Nor can you tax people fairly with a tax form that fits on a postcard.
Let me give you a concrete example of why the income tax code has to be complicated. Let’s say you own a small business, and you take in $500,000 of sales revenues, but you paid $300,000 for the goods sold, plus you have rent, wages, local taxes, and other business expenses totaling another $100,000, plus you spent $100,000 on equipment you expect to use for 10 years, and then sell to a scrap dealer for $1,500. What is your income? Certainly not the gross revenues before expenses. Your income is no greater than the $100,000 left over after direct business expenses. But what about the $100,000 you spend on equipment? Does that make your income $0? Or do you spread that cost over 10 years, and count the amount by which it depreciates as an expense, resulting in another subtraction of $9,850, leaving $91,150 of taxable income after business expenses and equipment depreciation? That’s why you can’t write an income tax code 3 pages long, or file an income tax return on a postcard.
It’s true you can eliminate all this complexity by taxing consumption instead of income. At least in theory. But in real life, taxing consumption isn’t as simple as it looks on paper. To make them work, the advocates of these schemes — if you listen and read carefully — virtually always layer on complexities of their own. For example, a common ploy is to make consumption taxes — which are inherently highly regressive — fairer and less onerous to the poor by adding some kind of rebate scheme. But getting the rebate requires doing calculations and filing forms, just as the income tax system does, and it seems likely that many of the people who would benefit most from the rebates won’t go to the trouble of claiming them.
You’re probably getting impatient and bored by now, but I’m not done yet. There’s a huge issue we need to address. I’ve already touched on the fact that the tax “reform” schemes being pushed by nearly all of the GOP candidates (Kasich is an exception) will result in drastic reductions of federal revenue, blowing a huge hole in the federal budget. These A joke goes, “How much did you make? Send it in.” charlatans assert their tax proposals won’t create massive deficits, but what they’re not telling you is the only way this can be true is if they’re married with huge spending cuts. The target, of course, is the spending that conservatives have wanted to cut all along — things like health care, food stamps, and other programs that benefit needy citizens. Don’t expect them to touch defense or corporate welfare.
And that leads us, finally, to this: These tax proposals serve a second, and more important, function. They’re a scheme to stealthily implement Grover Norquist’s strategy of “drowning government in the bathtub.” Conservatives forthrightly tell us they want smaller government, but they’re deliberately evasive about what they’ll cut, because they know you won’t agree to it. We saw this in action last year when Paul Ryan presented his “Ryan budget,” which laid out spending targets but lacked specifics about what would be cut. This is a tactic Republicans have used over and over, and will continue to use.
The targets, of course, are middle class entitlements and regulatory programs that protect ordinary citizens from predatory business practices, whether it’s dumping toxic chemicals into a stream flowing through your neighborhood or charging 400% interest on short-term loans. This is a big part of what these tax “reform” schemes are actually about. They’re designed to reduce the government’s income, in order to make it easier to impose the spending cuts they favor. Their game is to intentionally cause huge deficits, and then tell us spending must be cut or the government will go bankrupt.
It’s bullshit, it’s deceitful, it’s malevolent; please, please, don’t fall for it.