Flat Isn’t Always Simple and Vice Versa

October 20th, 2011 at 9:00 am

There’s a theme developing in the tax debate that a flat tax, like Herman Cain’s 9-9-9 or another version that Gov Perry’s now talking about, is simpler than a system of progressively higher, or graduated rates.

Not so.  Both can be as simple or complicated as you like.  What complicates the tax code is not the rate structure, it’s the exemptions, loopholes, credits, and so on.

A flat tax has an immediate appeal because it sounds so simple.  But as the link above (to a NYT article) points out, most flat schemes exempt certain groups, like the lowest income households, or, if they’re a sales tax, essentials like food.  Even the Cain camp is now saying they’re going to tweak their plan in the light of new information.  And “tweak”=more complicated.

Conversely, a progressive system, where tax rates rise with income, can be perfectly simple and even administered automatically, as my former White House colleague Austan Goolsbee has pointed out.

Economists often like the flat tax because of its efficiency advantages—I’m hoping to write up something on that soon—it’s not as clear cut as it looks, I think—but that supposed advantage has to be weighed against equity/fairness concerns.

My point is that you shouldn’t be fooled into believing that any tax structure is truly simple until you’re intimately familiar with the details.  Complicating factors can and do and will enter any tax code that is written by people, whether it’s 9-9-9, a 17% flat rate, or any number of graduated rates.


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10 comments in reply to "Flat Isn’t Always Simple and Vice Versa"

  1. D. C. Sessions says:

    At two extremes, a flat consumption tax is seriously regressive in that it exempts from taxation the primary uses of money by the very wealthiest. A flat wealth tax is extremely progressive because wealth is even more unequally distributed than income.

    • Chigliakus says:

      A flat wealth tax sounds fantastic, but extremely difficult to implement. Has any society ever manged to implement such a system?

      • Chigliakus says:

        I guess I should check Wikipedia before typing a reply… It appears France, Switzerland, Liechtenstein, Netherlands, Norway, and India all have some variant of wealth tax, but they all appear to be progressive and not flat. This makes sense to me, a cut-off at the very low end of the wealth spectrum ensures that the poor aren’t having their property (ie. house) confiscated as taxes because they lack any liquid assets with which to pay.

        • D. C. Sessions says:

          You really don’t need much if any cutoff.

          The USA has a net personal wealth on the rough order of $50T. Completely replacing the income tax would take on the order of 2-3% tax on wealth. For the median family, that’s in the range of hundreds of dollars per year, much less than their current income tax.

          Even for someone like me at around the 95th percentile in income, 60, with a fair bit of retirement savings, a 3% wealth tax would be either a break even or a slight savings.

          What I like about it, though, is that it incents putting wealth to work rather than into shelters (the opposite of consumption and income taxes, please note.)

      • abcd says:

        US states and localities do it. Property taxes, auto taxes. It would not be very hard to add taxes on liquid assets held in banks and brokerages.

  2. Sandwichman says:

    Flat is the new stupid. Does it dawn on these tax savants that the principle they are enshrining is equality?

    That principle can be interpreted variously: equality of sacrifice, equality of outcomes, equality of opportunity. And each of those equalities can be interpreted in several ways: equality of sacrifice may mean a poll tax, where everyone pays the same absolute amount; a proportional percentage tax, such as the flat taxers advocate; or a progressively graduated tax that tries to account for the differential utility of an extra dollar of income to people of different incomes.

    An early president of the National Association of Manufacturers, David M. Parry (with an “a”), wrote a dystopian novel in 1905 titled The Scarlet Empire whose leitmotif was a reductio ad absurdum parody of the notion of equality. The excess uniformity ultimately came down to legislation that everyone had to chew their food the same number of chews. I suspect Parry would have had no objection to a uniform tax, though, in which everyone, rich and poor, paid the same amount but surely he would have embraced the abstract equality of Governor Perry’s flat tax proposal.

    Funny thing about equality: everyone’s supposed to be equal but some are more equal than others.

  3. Fred Donaldson says:

    The rich want a flat tax and a low income tax, so the poor pay more and they pay less. You don’t need to be an economics professor to see their logic – greed, more luxuries for them and the hell with anything paid for to benefit the public good.

    Folow the money is still good advice, even if the term harkens back to Watergate.

  4. Edmundo says:

    The trouble is it always gets complicated – and for bad reasons.

    A flat tax would be nice, and it could be simple if:

    The minimum wage covered the total cost of supporting (and replacing) a ‘basic’ employee – including the employee’s tax bill.

    There was a benefit system that paid on the basis that tax is collected on benefits. (To get benefit you have to be a tax payer.)

    Income tax covered all sources of wealth for all citizens – no exceptions, no allowances.

    Salaries had not been already progressively inflated to accommodate progressive tax rates. Fairness cannot be enforced by the tax system, because salary levels are set within it, and get the final vote. Progressive tax rates lead to accommodating salaries and wage bills that stifle individual progress.

    Any tweaking should be done through the benefit system – which has to recognize personal circumstances. It is not necessary to have two different systems sensitive to personal circumstances.

    If you want an element of different needs to be recognized for whole sections of society with similar incomes, use a sales tax to identify non-essential, discretionary spending – and use it for that purpose only.

    There are problems getting from here to there, but they are trivial compared with getting from where the economy is to where we want it to be. It would make sense to sort out the tax system while we sort the economy – otherwise the incentive to sort it out will go away, and we will be back in this corrupt system waiting for next time …

    The overwhelming (dis)advantage of a system so transparently simple is its lack of worm holes for the wealthy or unscrupulous, and its crudeness for nuanced (i.e. complicating) fiscal controls – both of which are design features.

    We don’t need complex controls to run our economy – we are not clever enough to know whether or how they work, let alone how to use them. We have to keep it simple. Primarily tax income at a flat rate. For gross sensitivities – and only for that purpose – use a sales tax. For personal circumstances use a benefit system.

  5. David R says:

    These comments here are as good a take as any on the forthcoming Perry flat tax.


    It is very hard to take the Perry plan or the 999 Plan (what Krugman calls Plan 9 From Outer Space) seriously. Seriously, it is.

  6. Tom Cammarata says:

    Since its inception, Congress has packed the tax code with politics, with rewards and punishments, with hand-outs and take-aways, in line with the current majority’s current social engineering plan. No Congress — Republican or Democrat — will ever undo that, because taxation is the basis and essence of its power, thanks to Article One of the Constitution.

    They may shift details around, awarding new grants to some classes (the Rich), taking some away from other classes (the Poor), bribing others (the MIddle), but the essential structure and purpose remain unchanged, political control.

    Consequently, any and all politicians or presidential aspirants can dream up changes to the tax code, knowing full well that if elected, nothing will change. Too much political capital is built into the code.