The Flat Tax fable

Flat tax fable

For decades I have heard politicians claim that we need to rid the US of the tax code and implement a different system.  I remember Ross Perot, who ran for the US Presidency in 1992, using taxes as a main platform issue.  “Your tax form should be the size of a Postcard” was his slogan.

Every politician since then has claimed they would make some type of tax reform.  Taxes should be simplified, taxes should be fair, taxes should not have so many loopholes for special interests.  It seems everyone knows that the tax code is broken, yet we never see any positive change.  In fact the US tax code has grown to just shy of 75,000 pages in 2015.  This is up from near 35,000 pages since Ross Perot ran for office, demonstrating that our problems are continually getting worse.

To get an idea of how complex today’s tax code is, if your full time job was to read the tax code it would take you almost two years of full time work to do.  This is not taking notes, this is not cross referencing information, and this is not attempting to make any sense of the data.  It is just reading the tax code.  You would barely be halfway through the current tax code when you would be holding an obsolete regulation, and you would need to start over with a new book.

I won’t get into the cronyism and favoritism which is making the problems worse.  I will acknowledge that they exist, and acknowledge that we must address that issue.  There are plenty of papers and articles tackling the subject of corruption around the US Tax code.  The purpose of my work is to determine if something else is involved.  If the right person was voted into office, could we really expect a change?  

The answer to this is sadly “No”, at least not any time soon.

The loopholes inserted into the tax code allow the wealthiest and most capable of paying taxes to do the opposite, and not pay at least a portion of their  taxes.  Because of those loopholes, a massive economy has grown around the US Tax code.  Law firms, Lawyers, and CPAs make their living off of the system.  In addition to people being paid to find the loopholes, people pay for directions on how to take advantage of those and other loopholes.  Of course another market made up of Government offices and bureaucrats  is ensuring that the paperwork exists to make the use of the loopholes all legal, and lobbyists to generate more loopholes for special interests.

Outside of direct beneficiaries, we have a separate market which exists to support those who can’t afford to use the loopholes, but still need assistance in making sense of the US Income tax forms and ensuring everything is in order when they submit their forms.  Lawyers and law firms for representing those people when needed.

Not to be left out, we have a massive number of Government employees who would lose their jobs because they too are supported by this massive, and corrupt, system.  There are Government courts which would no longer be needed, IRS agents and auditors would no longer be necessary, accountants, computer programmers dealing with automating the processing of these complex forms.  

We should not neglect that with all of those closing businesses, the supporting infrastructure would also be out of work.  Offices would close leaving buildings vacant and displacing building staff, restaurants who supported those buildings would close, garages and gas stations supporting the drivers would close, leaving millions more people out of work.

The US Tax “problem” is a massive industry worth at least 100 Billion a year.  The reality is that anyone attempting to drop the system in favor of a flat tax would cause a massive economic collapse.  It is sadly a broken window fallacy taken to the extreme.

As we enter a new generation of political candidates making promises, remember that any claim of moving quickly to a flat tax is a fable.  Correcting the tax problems will take time to transition a very large economy to a new source of income.  Candidates should be focused on how to make this transition, and not make promises they won’t be able to keep.