November 28, 2006

Bush on Estonia's "Transparent" Flat Income Tax

Via the TaxProf Blog:
President Bush is touring Estonia this week, and apparently is quite smitten with that country's flat-rate income tax. He told reporters "I appreciate the fact that you got a flat tax, you got a tax system that's transparent and simple." As the AP article notes, this became a bit of a talking point for him over the course of his visit-- he went out of his way to mention it to reporters again.

The AP article uncritically accepts this version of what simplifying tax reform ought to be:
Back home, Bush has pledged to simplify the tax laws in the United States, which he calls a complicated mess. One idea is a flat tax, which taxes all income at a single rate and gets rid of deductions. Yet comprehensive reform of the U.S. tax system has gone nowhere in Congress.
Yeah, that's "one idea." But it's hardly the only way-- or even the best way-- to clean up the tax code. When anti-tax folks wave around copies of the Internal Revenue Code to dramatize how complex the tax code has become, they're not waving pages and pages of graduated tax rates. They're waving a book full of loopholes. Special targeted deductions, exemptions and credits that are designed to benefit specific groups for specific reasons. The first step toward a rational income tax should be to weed out unnecessary or outdated tax breaks.

Administering and enforcing these special tax breaks is a nightmare for tax administrators, and applying for them is a pain for the beneficiaries. By contrast, having a graduated income tax doesn't add even a line to the tax forms, and adds virtually nothing to the size of the tax code.

The mantra of "flat= simple" is a clever trick, and one that advocates of paring back progressive tax systems frequently rely on. But it's also a red herring. CTJ's 1996 report, The Hidden Entitlements, gives a laundry list of some of the most egregious loopholes-- a great starting point for anyone truly interested in tax simplification. This argument holds at the state level, too-- check out this ITEP report on progressive income tax simplification options.

I get the sense that progressives are sometimes afraid to back tax simplification as a policy goal, simply because anti-taxers have so successfully (and misleadingly) equated simplicity with flatness in their rhetoric. But, as both the CTJ and ITEP reports show, the best simplicity-enhancing tax reforms are often the most progressive ones. For example, eliminating the host of special tax breaks for capital gains income that now exist, and taxing this high-end income source at the same rate as the salaries and wages most of us rely on, would eliminate entire schedules from the federal tax forms-- and would have little or no impact on most American families.

Progressives, take note: tax simplification is your friend!


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