Just about everyone agrees that our tax code is a mess. One reason: it is littered with tax breaks of all sorts -- from exclusions for employer-provided health insurance to the deduction for mortgage interest, to credits for home improvements and hybrid cars -- which make our tax code one of the most complicated in the world.
Yet, a realistic way to reform our tax system is not to scrap it completely and replace it with some theoretical "flat tax," but rather to go back to a model that has worked in the recent past, namely to adjust our graduated rate structure and to broaden our income tax base by removing many of the complicated and unnecessary tax breaks.
The flat tax first became politically popular in 1996 when the publisher Steve Forbes made it a centerpiece of his presidential bid.
Forbes's flat tax called for replacing our progressive income tax with a single 17 percent tax on consumption, which exempted all investment income. Forbes, of course, failed to secure the Republican nomination. And the flat tax went down with him.
Although variations of Forbes's flat tax seem to reappear every four years, the levy remains a bad idea for several practical and political reasons.
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First, like all so-called "pro-growth" tax cuts, the flat tax inaccurately presumes that reducing taxes will automatically and invariably lead to economic prosperity.
Historical and comparative studies have shown that the relationship between taxes and economic growth is too complex to believe that simply reducing taxes will necessarily lead to increasing economic output.
A second practical concern is that flat tax proposals fail to deliver the simplicity they promise. Flat tax proponents contend that by replacing our multiple tax brackets with a single rate, we would be able to file our returns on a postcard. But the current complexity of our tax code doesn't come from the graduated rate structure.
In an age of Turbo Tax, calculating tax liability is a breeze. Clicking a mouse, after all, is even easier than mailing a postcard. The harder part is calculating taxable income, which requires knowing which of the numerous tax breaks one is entitled to.
Under a flat tax, high-income families would face a lower tax rate and much of their income, which comes from investments, would be tax exempt. The working poor would lose such benefits as the Earned Income Tax Credit, and the middle-class, which spends most of its earnings on everyday consumption items, would bear the brunt of the tax burden.
The more politically feasible option is to return to the type of fundamental tax reform that guided lawmakers in 1986. Back then, bipartisan political leaders understood that tax reform entailed compromises and partial victories. By removing some tax breaks and lowering tax rates, lawmakers were able to secure significant and meaningful improvements that made our tax system fairer and more efficient.
Ajay K. Mehrotra is a professor of tax law at the Indiana University Maurer School of Law.
