Explaining Southern California's economy

Why are politicians fixated on a 'simple' tax code?

Mercer 20709

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Pictured: the advanced technology used to calculate the nation's taxes.

Herman Cain has his 999 plan. It's so much simpler than the excessively complex system we have now. Rick Perry just unveiled his 20-20 plan, which is also so much simpler than the excessively complex system we have now. And just today, I heard California Senator Dianne Feinstein support a recommendation, from Erksine Bowles and Alan Simpson's Deficit Commission, to reduce out current six tax brackets to three: 12, 20, and 27 percent (the top rate is now 35 percent).

Simplicity, it seems, sells. But why?

If anything, federal taxes are far easier to file than ever. I used TurboTax for the first time this year and, once I had gathered all my documents, the process consumed about an hour. In 1979, however, long before TurboTax came along, people managed to deal with 17 tax brackets, using a Bic ballpoint and calculator. In 1945, they confronted 24 brackets with nothing more than a No. 2 pencil, a pad of paper, a pack of Lucky Strikes, and stiff drink.

My point is that the argument, now routinely heard on both sides of the political spectrum, that we must simplify the tax code to prosper as a nation is ridiculous. A relatively inexpensive computer tax program can breeze through six brackets and digest a variety of deductions and special cases. I can't imagine that, in the age of Google, iPhones, and the Cloud tax, technology would choke on, oh...12 brackets? 

The real choice is between a progressive tax system and a flat tax. Over time, we've gotten closer and closer to a quasi-flat-tax as we've eliminated brakets. A three-bracket system would basically be a tri-tiered flat tax: if you're just north of poor, you'd be taxed at 12, if you middle-class, 20, and if you're rich, 27. And if you're extremely rich...still 27. And if you're mega-rich...well, if you even have a job, it's still 27. 

The cost here is obvious. With Cain's or Perry's plan, you get to fill out a postcard instead of submitting to the 1040 form — but if you make $400,000 a year, you also get to pay only 27 percent of your taxable income, versus 70 percent in 1979. This continues the trend of cutting taxes for high-earners while forcing the middle-class to make up the revenue shortfall. Although it is true that middle-class earners do see a cut of their own. But then again, it makes sense to cut taxes for the middle class, because those folks are more likely to spend the money, delivering the stimulus effect the the economy desperately needs right now.

By contrast, when you cut taxes for the wealthy, the tendency isn't to spend but save. And, of course, invest, thereby moving the money into a place where it can generate capital gains income, taxed at 15 percent. Although the theory that this investment will spur hiring and business activity has been questioned since the days of "trickle down" economics and Ronald Reagan.

Bottom line: Modern life in America might seem complex, but on the tax front, we have the technology do handle a much more complicated system. In the end, it could actually be cheaper than what we have now, assuming savings from automated efficiency and the chance to more precisely tax income levels. A system that could favor complexity when necessary could serve us far better than following opportunistic political prescriptions to simplify, simplify.

Follow Matthew DeBord and the DeBord Report on Twitter.

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