Rick Perry's Flat Tax Snake Oil
Don't trust the Texas governor's new tax plan.
Rick Perry lies like a rug.
Last week he floated a flat-tax proposal that, he says, would make life simpler for taxpayers. That's a snake-oil pitch if ever there was one.
When he unveiled his scheme, Perry took a postcard out of his pocket and called it the "best representation" of his plan. "Taxpayers will be able to fill this out and file their taxes on that," he said. Under Perry's plan, the flat rate for everyone would be 20 percent—unless you want to stick with the current tax plan, which he would allow. That's a pretty big complication right there. To find out which system you're better off using, you would have to calculate not one set of tax returns but two. Only then would you be in a position to choose which way to file.
But that's a side issue. Here's the real problem. Taxes are not complicated because it's hard to multiply your taxable income by X percent. (Heck, the IRS even does the math for you.) Taxes are complicated because of everything leading up to that final calculation.
Perry's proposal maintains personal exemptions, as well as deductions for mortgage interest, charitable contributions, and state and local taxes. The sample tax return on his website makes it look as though all you have to do is plug in the figure for each of those categories, subtract them from your gross income to arrive at your taxable income, and then multiply that figure by 20 percent. Easy as pie, right?
Wrong. Anyone who has filled out an IRS return knows there is much more to it than that. Documentation, for starters. If you claim you gave $5,000 to charity, you had better be able to prove it.
Even that is fairly straightforward. The really complicated question is how much you received in income in the first place. Some people collect one paycheck and nothing else. But many Americans have money coming in half a dozen ways. That's where things get hairy fast:
Did you collect any interest last year—and if so, was it taxable or tax-exempt? Did you receive any dividends? If so, where's your Form 1099-DIV? Did you collect alimony or jury-duty pay? Did you make any money from tips? (Allocated tips should be shown in box 8 of your W-2. See Pub. 531 for more details.) Renting out your basement? That's income—see Schedule C. But note that improvements to the property can be depreciated using the modified accelerated cost recovery system. Are you a student? Scholarship money used for tuition does not count as income, but scholarship money for room and board does. Do you run a business out of your home? If the business percentage of an indirect expense is different from the percentage on line 7 of Form 8829, enter only the business part of the expense on the appropriate line in column (a). . . .
It's true that the tax code is cluttered up with a lot special favors for particular industries, groups and causes. But as the preceding paragraph indicates, much of its complexity arises from the fact that modern life itself is highly complex.
There's really only one way to make federal taxes so simple you could file them on a postcard: Replace the income tax with a capitation tax—i.e., a head tax. Under a head tax, people don't pay a flat percentage regardless of income. Rather, everybody pays the same dollar amount. Now that's really flat.
Of course, a capitation tax would create a whole new basket of problems. There's the social-justice angle, for one; even conservative Republicans generally think the rich should pay more. It's also difficult in a practical sense. In 2010, Washington collected about $900 billion in federal income taxes. To raise a similar amount from a capitation tax, every U.S. resident would have to pay $3,000. That would create a real hardship for, say, working-poor couples with children. On the other hand, if the capitation tax were set low enough so everyone could afford it, then we would have to learn to do without a few things: the Department of Defense. Medicare. Medicaid. Little things like that.
But you really could fill out your taxes on a postcard. Still, it's doubtful even a wild man like Perry would try to sell the public on that idea. He may be dumb, but he ain't crazy.
A. Barton Hinkle is a columnist at the Richmond Times-Dispatch. This column originally appeared at the Richmond Times-Dispatch.
