Flat Tax v. Simple Tax

There has been a log of talk lately about the need to simplify the tax code. Let's start by assuming that is true (at the end of this post, I'll briefly address whether it is true). Right now, we have a tax code that is both progressive - meaning tax rates change as income changes - and has a lot of exemptions and deductions.

What makes the tax code complicated are the exemptions and deductions, which are numerous and the wealthy can use to decrease their tax liability. The progressive nature of the code is not what is complicated. In fact, without exemptions, figuring out your tax liability would be simple. You pay a certain percentage on your income below a certain amount, and a higher percentage on income above that amount.

What we are seeing from Republican candidates are proposals for flat taxes, which eliminate deductions and the progressive tax code. They are trying to make it sound like a flat tax is necessary to simplify the code while hiding that what will really happen is a tax cut for the wealthy. They are also adding back in some exemptions (Herman Cain's 999), which seems to be the worst of both worlds - a regressive tax that remains complicated.

Before I end, I do want to address whether the complication is necessary. The exemptions and deductions are used to incentivize certain behaviors. We can argue the merits of each exemption, but in general, we should decide whether we want a simple code and forgo providing incentives for things like homeownership, donations to charity, and affordable housing to name a few.

I don't have a strong opinion at the moment. I would rather affordable housing be provided through direct spending rather than tax spending. However, I realize tax spending is easier to implement than direct spending - contrary to rational economics models, there appears to be a psychological difference between the two. And I think charity spending is often to museums and private colleges, which may not be the most deserving or urgent needs. But I could be convinced that we need the incentives if there are better examples.