EDITORIAL: Flat Tax Talk Shows Current System Disliked
October 25, 2011 (Knight Ridder/Tribune Business News) The apparent popularity of the flat tax talk by Republican presidential candidates Herman Cain and Rick Perry suggests there may be support for changing the way the Internal Revenue Service does business, but not necessarily a wholehearted endorsement of the flat tax idea.
The flat tax idea sounds inherently fair. Everyone pays the same rate, more or less. Even that unpolished idea seems to garner more public support than the current system that seems to reward conniving and high-priced accountants, while regular people pull their hair out by they time they've read the instructions.
The current tax system needs simplification, not necessarily the radical overhaul of a flat tax. Cain has proposed the 9-9-9 solution of a 9 percent sales tax, a 9 percent income tax and a 9 percent corporate tax. Perry has now suggested a 20 percent flat tax that would allow people to use the old tax code or the flat tax and would allow some deductions.
Both have lots of details that would need to be worked out. We suspect those details might be as complicated as the current tax code if one wasn't careful. And such a radical overhaul, as Newt Gingrich says, would be unfeasible in the time we have.
But both state and federal tax codes should be simplified. There are currently thousands of provisions subject to revision every year. And those thousands of provisions also leave a lot of room for lawyers and judges to determine just what they might mean and how they might apply.
Experts point to the 1986 tax reform act as a possible model for simplifying taxes. That plan lowered income tax rates, but also did away with deductions that didn't make sense, like the three martini lunch deduction. Businesses used to be able to write off the entire amount of such extravagances as a business expense. The reform law lowered the amount to write off to where it was very low or almost nothing.
But lots of other favorite deductions have crept back into the code through decades of lobbying and good economic times. It's amazing how many tax breaks we can approve when times are flush.
Now, of course, the federal budget deficit weighs heavily on the economy. We're not in a deduction mode, and rightly so.
Still, there are opportunities for reform. Both Minnesota and the federal government require an annual report on so-called "tax expenditures" that detail the cost of all deductions, credits and special breaks. We have the data to make the choices on what "tax expenditures" can be cut.
Simplifying the tax code also makes it more understandable. And people can then make a judgment as to its fairness, and, hopefully, their willingness to pay their fair share. The tax code now is seen as inequitable and creates incentives for people to avoid paying taxes altogether.