Taxes: Flat isnt always simple and vice versa

There’s a theme developing in the tax debate that a flat tax, like Herman Cain’s 9-9-9 or another version that Gov Perry’s now talking about, is simpler than a system of progressively higher, or graduated rates.

Not so. Both can be as simple or complicated as you like. What complicates the tax code is not the rate structure, it’s the exemptions, loopholes, credits, and so on.

A flat tax has an immediate appeal because it sounds so simple. But as the link above (to a NYT article) points out, most flat schemes exempt certain groups, like the lowest income households, or, if they’re a sales tax, essentials like food. Even the Cain camp is now saying they’re going to tweak their plan in the light of new information. And “tweak”=more complicated.

Conversely, a progressive system, where tax rates rise with income, can be perfectly simple and even administered automatically, as my former White House colleague Austan Goolsbee has pointed out.

Economists often like the flat tax because of its efficiency advantages—I’m hoping to write up something on that soon—it’s not as clear cut as it looks, I think—but that supposed advantage has to be weighed against equity/fairness concerns.

My point is that you shouldn’t be fooled into believing that any tax structure is truly simple until you’re intimately familiar with the details. Complicating factors can and do and will enter any tax code that is written by people, whether it’s 9-9-9, a 17% flat rate, or any number of graduated rates.