In recent days, both front-runner Newt Gingrich and Texas Governor Rick Perry have touted their respective “optional flat tax” plans as an easy solution to a complicated tax system. Under both plans, taxpayers would have the option of filing under the existing Tax Code or filing with a flat tax rate (Perry has suggested 20% with Gingrich floating a 15% rate). A reader kindly forwarded me a link to Gingrich’s plan with a note that “this seems like a good compromise for tax reform.”
I’m going to have to respectfully disagree.
It’s not tax reform. It’s ignoring tax reform altogether.
It’s acknowledging, on the one hand, that the Tax Code is far too complicated as it stands. And it is clearly admitting that reforming the existing Tax Code is going to be hard. And rather than do the hard work, it’s throwing out the baby – but keeping the bathwater – by saying that we’re going to keep the existing system and add another option. This doesn’t make things better. It makes things harder.
Don’t believe me? Quick: what’s your effective federal income tax rate? No, not your tax bracket. Your effective tax rate is that rate that you pay after all of the adjustments, credits, and deductions and taking into consideration the progressive tax rates (remember that all taxpayers pay the same rate of tax (10%) at the bottom and the rate steps up at increments so that taxpayers in the higher brackets pay 10% for income at the bottom, 15% for income at the next level and so on). Chances are, you guessed high. The Tax Foundation estimated the average rate for those with a positive tax liability (so, omitting those at the very bottom who paid no tax) to be 11.06% in 2009. That sounds about right. If you’re curious as to how you measure up, you can quickly divide your taxable income (line 43 on your form 1040) by the total tax (line 60 on your form 1040).
When we talk about tax, though, we tend to focus on marginal tax rates. Your marginal tax rate is the rate that you pay on the last dollar of tax (in other words, the highest rate of tax that you pay). Again, remember that all taxpayers are subject to the same tax bracket structure so that we pay the same 10% at the bottom, the same 15% at the middle, and so on. At some point, since it’s a progressive tax, every dollar that you make at the top is subject to the highest rate of tax.
The difference in those terms is huge and shows how complicated the discussion about tax rates, tax burden, and tax reform can be. It also illustrates why offering taxpayers an option is really a false choice in terms of making things simple.
Most taxpayers simply don’t know enough about their own returns to make that choice easily. That’s not my being critical or patronizing: it’s more of a commentary about our system than our taxpayers. To be honest, I had to pull my own return to see what my effective rate was, and, yes, I thought it was much higher than it was. To make the choice between which made more sense for me (flat tax or the current system), I would have required my accountant to run both returns and tell me which one produced the best result. How is that better? It’s not more simple. It’s not more efficient. And it’s definitely not more economical.
Tax reform. By its very nature, it means changing the existing system, not merely adding more layers. I don’t claim to have the answers but I think that the real work to be done involves taking pieces out of the Code, not putting more in. And that’s not easy. I’ve said before, to quote Scorsese, “There’s no such thing as simple. Simple is hard.”
