The timely op-ed in today’s Wall Street Journal from Princeton economics professor (and former Federal Reserve vice chairman) Alan Blinder debunks a current myth in Washington that when it comes to taxes, flat equals simple.
“Many useful steps could be taken to simplify the personal income tax. But, contrary to much misleading rhetoric, flattening the rate structure isn’t one of them,” Blinder notes.
That’s because “100% of the complexity” in the tax code derives from
, Blinder says, not from the fact that it contains multiple brackets (i.e., that it taxes different incomes at different rates).
Think about filling out your own taxes the old-fashioned way. The last step is to consult a table in the instructions and find out how much tax you owe. You don’t have to break out your calculator and multiply different portions of your income against the applicable tax rate for each. The table gives you a single figure, just as if there were a single rate.
“[F]lattening the rate structure won’t make the tax code any simpler. It would, however, make the tax system far less progressive,” Blinder warns, by lowering the rates for high-income taxpayers.
Proposals to shrink the number of tax brackets often include reforms to tax preferences, as well. Limiting tax preferences might simplify some families’ taxes, but depending on how it’s done, it could end up raising taxes on low- and middle-income families — not a good bargain.
For example, the recent offer from some Republicans on the deficit-reduction “supercommittee” would apparently limit the value of many tax preferences that benefit low- and middle-income families, while locking in a very low top tax rate and shielding the biggest tax preference for high-income Americans: the special treatment of capital gains and dividends.
A flatter tax system may sound great, but in reality, it would likely entail a massive shift in tax burdens from wealthy households to those who are less affluent.