One of the more distressing aspects of the Bush Administration’s distractions is the abandonment of the movement toward income tax simplification. In this lucid EconTalk session, Alvin Rabushka of Stanford University’s Hoover Institution lays out the case for the flat tax, which he has been advocating with colleague Robert Hall since 1981. Rabuska’s plan would reform the current system that is based on the 66,000 page U.S. Tax Code with a single rate and no deductions other than personal exemptions, and each individual tax return would be the size of a postcard. This is a common sense reform that is long overdue for many reasons, including one that Russ Roberts makes: “Wouldn’t it be wonderful if all the talented people who currently help rich people avoid taxes were instead encouraged to something productive?” Check out Rabushka’s talk.
Houston's Clear Thinkers
Longtime Houston attorney Tom Kirkendall's observations on developments in law, business, medicine, culture, sports, and other matters of general interest to the Houston business, professional, and academic communities.
Wishful thinking.. and not just because Congress will never agree to give up what is a major engine for campaign donations.
Unless you also eliminate accrual accounting, eliminating deductions will do nothing to rid us of the thousands of pages devoted to defining income… the ‘art’ of defining what income is and when it is to be recognized for tax purposes. We’d still have to deal with the issue of when to recognize installment sales income, of capital gains (when sold? when realized?) and so on.
As far as eliminating deductions, do I presume advocates are proposing eliminating all deductions? Such as for cost of goods sold and other business expenses incurred by sole proprietorships? If they’re not, then you’re stuck with the thousands of pages that address these items… and if you do, then you’re effectively taxing sole proprietorships on their gross income and not their net profits.
And how much complexity is added by having different rates? Is it really that hard to take your taxable income and look on a table to figure out the rate?
Lastly, for how many people is the tax code really that complicated? With more and more people using professionals and/or software to do their taxes, the hardest part is keeping track of what comes in and what goes out. I spent all of two hours doing my return this year… a good part of which was rummaging through my files to make sure I didn’t miss any charitable deductions.
Steve is largely correct. The complexity is largely on the business side of the code. Personal taxes aren’t that difficult. If simplification is what you are after, for larger businesses, say those with gross income above $20 million (completely arbitrary cutoff, but I use it for magnitude purposes), make taxable income equal to GAAP net income. No more keeping two or three sets of accounts and the incentives are all moving in the right direction, since managers will typically want to maximize GAAP income.
Making taxable income equal to GAAP income will make the tax code only somewhat less complex, as there are only a handful of items for which tax and GAAP are calculated differently. And don’t forget, calculating income per GAAP is no easy thing either… if it were, accountants wouldn’t need 4 years of college to figure it out.