Every so often we hear a television pundit espousing the virtues of a flat tax system. They will say something like “all we need is a flat tax of 17%, or 18% or 19% and it will cover the nation’s budget”.
The underlying fallacy of a flat tax system is the assumption that the primary purpose of the United States Tax Code is to raise money for the government. I agree that raising money for the government is a reason, but I would argue that it is not the primary purpose of our tax code as it exists today!
The number one problem with our current tax code is that it does not have a primary focus, and thus has become a hodge-podge of rules.
Think of the tax code as a three-legged stool.
The first leg is what we think of when we think taxes. It is a source of revenue for our government. That being said, our government does have other sources of revenue. You may be surprised to know that about sixty percent of Federal revenue comes from individual and corporate income taxes and forty percent from other sources.
The second leg is social policy and economic stimulus. Ask yourself, what does being able to deduct your home mortgage interest have to do with taxes? Why do we get a credit for purchasing an electric car or for energy efficient improvement to our homes? Why in the world do entities that invest in low-income housing receive special tax credits and depreciation rules? And the biggie, what does health insurance have to do with income taxes? The tax code in a primary tool that Congress uses to steer social policy and economic growth. Especially economic growth within specific industries.
Of course the third leg is PORK-BARREL projects that Congress uses to for what-ever is the flavor of the moment. Why in the world would any self-preserving congress person give up that nugget?
My opinion is that our existing tax code will never be replaced with a flat tax. I do think that some congress person may figure out how to implement a national sales tax so that Congress can have its cake and eat it to. The income tax as we know it and a national sales tax to make all the flat tax pundits happy. Be careful what you wish for!