Friday, January 20, 2012
Dreaming of a Simple Tax System
My son, Nick, is 21 years old. He lives at home, works about 35 hours a week at a local bakery and is taking two classes at the community college this semester. This week he got his W-2 form from the bakery and took it to H&R Block to have his taxes done.
That says something about our tax system, but I’m going to try to avoid easy posturing about its being too complicated. It probably is, but skewering it for that is a simplistic cheap shot. It’s not at all clear that a far simpler alternative would really be any better.
Taxes, governmental regulations, lawyers and accountants are all unpopular outgrowths of a complex industrialized society. At some level we all want to close a deal with a handshake, rather than a 30-page contract, and most of us would probably love to have a one-page tax form that could be filled out in 10 minutes after dinner on April 14.
For a variety of reasons, that’s not likely to happen. In the past 40 years, nearly every presidential primary season has generated at least one candidate (usually a Republican) with a highly touted plan to simplify the tax code, generally with some variation of a flat tax. I call these people GANH candidates, because they’re invariably Gone After New Hampshire.
Whenever a GANH candidate begins to pick up traction in the polls, as Herman Cain did last year and Steve Forbes did a while back, a funny thing always happens. People who know a thing or two about economics begin to take a hard look at their tax plans, and they never stand up to any serious intellectual scrutiny. Simplifying the tax code apparently is not as easy as most people think.
In most cases, the simplification isn’t even that simple. Bruce Bartlett, who served as an economic adviser to Ronald Reagan and Jack Kemp, wrote recently in the Times that if you create a flat tax with deductions — even for such popular items as mortgage interest and charitable contributions — you defeat the simplification rationale of the flat tax. And if a tax is truly flat, the benefits invariably skew to the high earners.
Consider the point of charitable contributions. If someone makes a million dollars in a year and gives half of it to charity, should she pay taxes on the million or on the $500K that’s left after the charitable giving? The latter alternative, to me, is fairer than the first.
Some of the complexities of the tax code are nothing more than special-interest perks, but most of them derive from an attempt to factor in the reality of a large and complicated country. When I first went into business for myself, I was overwhelmed by all the rules on deductions, but most, once you get to know them better, are actually fairly sensible. My son has some education and training expenses that may be deductible, and if it takes an accountant or tax advisor to point them out, so be it. And I’m happy he sought out some informed opinion. Realizing when you’re in over your head is an indication that you’re getting older and wiser.
If the tax code is too complex, it’s in large measure because society is too complex. Our inner Jeffersonian might yearn for a simpler society, but the horses have long since departed through that particular barn door. The only way we’re going to get back to a simple society is if a nuclear war or environmental catastrophe turns the survivors into roving gangs of bandits. I’d rather take my chances with the IRS.