Fair Tax or Flat Tax or Any Reform

The source of the complexity of our tax code is not the assets which are taxed, but the capricious nature of the elected officials who make the law. Various deductions, rates and exclusions fill the code with a labyrinth of laws that even the IRS can't keep track of. The average taxpayer, intimidated by such complexity pays professionals to work out their tax liabilities adding up to billions of dollars each year just to comply. Several solutions have been offered with little results so far.

The Fair Tax and Flat Tax have their supporters yet neither has inspired enough elected officials to begin to press for change. Both ideas have the goal of making federal taxes simpler and more fair. The Fair Tax would eliminated the Income, FICA, Capital gains, Inheritance and Corporate taxes. These would be replaced with a national sales tax with a rebate to families for necessities. The Flat Tax would have one income tax rate for everyone with a generous personal deduction.

There are problems with both these proposals that need to be addressed to achieve the desired results of a fair and simple code. The Fair Tax rebate provision can lead quickly to the kind of filing difficulties that we have now. Top of the list is the definition of family. Already a minefield of policy with special interests carving out their turf, it is an area that could easily be exploited by politicians in the same way as deductions and exemptions are now. The Flat Tax has a simple rate, but without a hard cap or the restriction of taxes on other asset classes.

Any successful simplification of the federal tax code must remove from the elected officials any discretion in assigning exemptions or rebates. The legislature has a collective ignorance of basic economics. The attractiveness of political advantage trumps sound economic principles. Fiscal restraint has seldom if ever been anything other than a talking point with the elected class, so hard caps on rates and restrictions on taxable asset classes would be indispensable to a successful reform.

The likelihood of obtaining these restrictions is small. Only a groundswell of public support will prompt politicians to move in such a direction. Though they refer to themselves as leaders, they are not. Their leadership is merely an ability to recognize trends quickly and getting out in front of a issue they perceive as a winning one before their opponents. Tax reform's future depends on understanding this aspect of politics and use it to its advantage or it will fade into history as a good idea that never saw the light of day.