Commentary: A Flat Tax Might Make Apr. 15 TrickierMike Mcnamee
It's springtime, and you're struggling with that pesky Form 1040 and its alphabet soup of schedules. Along about now, the flat tax promised by GOP tax reformers sure sounds inviting. Fill out 10 lines on a postcard, pay one rate--say, 17%--and you're out the door and into the sunshine. Sounds heavenly, right?
Not so fast. Behind that celestial vision is one of the perverse rules of taxation: A simple form doesn't mean a simple tax. As championed by House Majority Leader Richard K. Armey (R-Tex.) and former Presidential contender Steve Forbes, the flat tax would retain some of the trickiest features of current law. It would add new wrinkles of its own. And rather than get the Internal Revenue Service off Americans' backs, a flat tax's gaping loopholes would keep IRS auditors busier than ever.
Even without Forbes pushing it, tax reform remains very much alive. GOP nominee-in-waiting Bob Dole pledges to support a "fairer, flatter, simpler tax" if elected. Any flat tax would mean big changes: It would wipe out itemized deductions; exempt individuals' interest, dividends, and capital gains from taxes; and let businesses write off new equipment immediately.
BOGUS DEPENDENTS. But that's no comfort for millions of taxpayers flummoxed by the first two questions on their 1040s: What's your filing status, and who are your dependents? Those two lines take up 6 1/2 pages in the 1040A instructions. "That's where people get stuck," says H&R Block Inc. researcher Susan Van Alstyne. "The law is simple--it's marriage and family life in America that's complicated."
Armey's plan invites abuse. The flat tax doubles the exemption for each dependent, but the postcard doesn't leave space to list dependents. Seven million bogus dependents--dogs, cats, imaginary friends, etc.--vanished when the IRS began requiring names and Social Security numbers in 1988. To prevent their return, the postcard must expand.
The self-employed would face more paperwork. Now, a small-business owner reports profits on his personal tax return. To claim the flat tax's personal exemptions, he would have to pay himself a salary, file quarterly and annual wage reports, and fill out two tax returns.
The business tax retains some complex rules, too. Under the flat-tax proposal, foreign income is tax-free. But firms would continue to battle the IRS over transfer prices, which determine how much of their income is earned abroad.
But the biggest snafus would arise in areas where the flat tax creates new loopholes. Under Armey's plan, interest income isn't taxed. So an appliance store might offer an $800 refrigerator for $100--provided you take 24-month, 400% financing. You'll still pay $800--but the dealer will pay tax on only $100.
NIGHTMARE. Also look for claims for company cars and home offices to soar. Today, a business vehicle is written off over five years, with strict records required to prove business use. Under a flat tax, the write-off is immediate, even if the car is used only occasionally for business. If a room in a 10-room, $200,000 house is used as an office, the owners might take a $20,000 tax deduction--with little to stop them from using the room as a den the next year. "I've looked at the postcard, and I can't find a line for recapturing those deductions," says Deputy Treasury Secretary Lawrence H. Summers.
Flat-tax fans say that no one will waste time with such games when the rate is cut to, say, only 17%. But even at 17 cents on the dollar, a $25,000 car deduction is worth $4,250--a tidy savings. And with so many flat-tax loopholes, "anyone with a small business could choose not to be a taxpayer," says Los Angeles accountant Michael Russo. Of course, Congress could keep the home-office and company-car rules that curb such abuses today. But that hardly squares with GOP reformers' sweeping promises to get the IRS out of taxpayers' lives.
Make no mistake: Today's tax code is a nightmare. But that's no accident. Taxes are complex because people's lives and the economy are complex--and because Americans will always push tax breaks over the limits. The flat tax may make filing easier, but it makes avoidance easier still. That's certainly not the kind of "fairer, simpler tax" that most Americans want.