Flat Tax Guide

A flat tax would be nice, but like warp drive and transporters from Star Trek.. it's not gonna happen in at least any of our lifetimes.

A flat rate structure would be great, but most of the rest of this is pie in the sky. I'm especially amused by the claim that all 893 IRS forms would be cut to two. Whoever wrote that sentence obviously knows very little about IRS forms.

The mistake that tax dreamers make is to imagine that all complexity must be the result of some error or evil intent. In reality, any tax system is complicated, and it becomes more complicated as it becomes fairer and more precise. Everyone understands that sort of principle in their own field of expertise, but it's human nature to imagine that everybody else's job is really easy and simple.

I'm not even sure about avoiding tax on investments. I agree that it would be economically beneficial if we could do it, but I'm not sure that it's possible. We already have a slight preference for investment income over income for services, in that investment income isn't subject to employment tax. The problem is that a whole lot of professionals make lots of money working for corporations of which they're part owners. So this poses an unanswerable question: What portion of the money that they receive from their corporation should they consider a dividend, and what portion should they consider salary? The law in that area is a complete muddle. Increasing the tax differential between dividends and earned income means that you're spawned intense interest and complexity on that question.

More broadly, I don't understand why conservatives are so prone to utopian thinking about tax law. We make fun of liberals when they insist that their latest scheme to radically change things will magically make the world wonderful. When Hillary proposes national health care, or when the Surrender Democrats propose cowardice as foreign policy, or when any politician proposes lawlessness as immigration policy, then conservatives jeer at them for their naivete in failing to see that the world isn't as we would like it to be, and never will be. Normally we're the hard-nosed, cynical, life-sucks-so-deal-with-it crowd. But on the subject of taxes, conservatives turn into goo-goo eyed Pollyannas, convinced that simplistic solutions proposed by tax amateurs can fix everything. I don't understand it.

BB: Over a dozen countries are simplified their tax returns to a single page, similar to that described in the referenced article. They seem to be working well. I don't know the details of taxes as well as you do, but when I see someone else doing something with good results I wonder why we can't do it too. Your objections all sound reasonable, and yet... Eastern European countries are doing exactly what the article described.

Which countries do you mean? I'm no expert on international tax systems.

Keep in mind that a tax system's size will correlate pretty well with the size of the economy it taxes, because a bigger economy produces a wider variety of difficult situations that the system must address. More money in the economy also means more wealthy people spending more money to attack weak points in the system.

Also remember that a tax system failing doesn't mean that the whole thing collapses. The key question is one of distortion: How much energy do people waste trying to game the system instead of doing something economically productive?

And of course the system would need to give people reliable answers to their tax questions. You can always simplify a legal system by leaving massive ambiguities.

I also wonder about the emphasis on personal tax returns. That may be what the voters gripe about, but the tax system's real heart is business returns, because that's where the tough income questions really crop up. Most voters don't see those tough questions, because most voters don't engage in complicated business transactions. But those transactions are a vital part of the economy, all the same.

If they're really making this work Eastern Europe, then I would love to find out about it. But until then, I say that the idea of a pamphlet-sized tax system for the world's largest economy is as likely as an improved version of Windows that can fit on a floppy disk. Is Windows a bloated monstrosity that could be dramatically improved? Of course. But could it be reduced to a few thousand lines of code? Don't be silly.

BB: Here's a quote from the guide:

Global Competitiveness. In a remarkable development, former communist nations are lead­ing a global tax reform revolution. Estonia was the first to adopt a flat tax, implementing a 26 percent rate in 1994, just a few years after the collapse of the Soviet Union. The other two Baltic republics of the former Soviet Union enacted flat taxes in the mid-1990s, with Latvia choosing a 25 percent rate and Lithuania picking 33 percent. Along with other free-market reforms, the flat tax significantly improved economic growth, and the “Baltic Tigers” became role models for the region. Learning from its neighbors, Russia stunned the world by adopting a 13 percent flat tax, which went into effect in 2001.

The Russian flat tax quickly yielded positive results: The economy prospered, and revenues poured into government coffers since tax evasion and avoidance became much less profitable. The flat tax then spread to Serbia, which in 2003 chose a 14 percent rate. Slovakia hopped on the bandwagon the following year with a 19 percent flat tax, as did Ukraine, which chose a 13 percent tax rate. Earlier this year, Romania joined the flat tax revolution with a 16 percent tax rate, and Georgia adopted a 12 per­cent flat tax rate, which has the honor, at least tem­porarily, of being the lowest rate in the world.

The flat tax revolution has been so successful that Estonia is lowering its rate to keep pace with other nations. The Estonian flat tax is now down to 24 percent and will drop to 20 percent by 2007, and Lithuania is in the process of lowering its 33 percent flat tax to a more reasonable 24 percent.[11] Poland’s government just announced that it will implement an 18 percent flat tax, and lawmakers in Croatia, Bulgaria, and Hungary are also considering tax reform. Last but not least, the opposition par­ties in the Czech Republic have promised to imple­ment 15 percent flat tax regimes if they win the upcoming elections.[12]