Many Americans find the idea of replacing the current federal income tax system with a single rate "flat tax" a very attractive one. As April 15 rolls around and taxpayers struggle to understand IRS forms and determine their liabilities, one of the most persuasive features of a flat tax seems all the more appealing—simplicity.
Flat tax advocates argue that the complicated documents and instruction manuals we suffer through each year could be replaced by a brief set of rules and a simple postcard-sized tax return. Economist Daniel J. Mitchell of the Heritage Foundation in Washington, D.C., says that this radical reform "appeals to citizens who not only resent the time and expense consumed by their own tax forms, but also suspect that the existing maze of credits, deductions, and exemptions gives a special advantage to those who wield political power and can afford expert tax advisers."
How much would a little simplicity buy? That’s the flip side of the question, how much does today’s complexity cost? The answer to both questions is probably more than what some of the income tax’s harshest critics might surmise. No wonder. The Washington, D.C.-based Tax Foundation reports that the number of words in the tax code grew from about 11,000 in 1913 to 740,000 in 1955 to an astounding 5.5 million in 1994.
A 1985 study by the accounting firm of Arthur D. Little, Inc., found that individuals and businesses more than a decade ago were spending a combined 5.4 billion hours annually on tax-related paperwork. That, according to John A. Barnes of Investors’ Business Daily, translates into nearly 3 million Americans—a population the size of the city of Los Angeles—working full time on tax compliance. It’s also more man-hours than it takes the Big Three automakers to build every car, truck and van they manufacture each year in the United States.
In spite of attempts in the late 1980s to simplify the tax system, it is more complicated today than ever before. The Tax Reform Act of 1986 was promoted as a time- and paper-saving reform but in making almost 2,500 changes to the tax code, it ended up producing 48 new tax forms. A 1994 study by the General Accounting Office referred to the tax code as "complex, difficult to understand, and in some cases indecipherable."
The work of economist James L. Payne is perhaps the most authoritative and exhaustive available on the cost of today’s federal income tax code. He has demonstrated that most of the expense of compliance does not show up on the government’s books because businesses and individuals in the private sector are paying it—in time and bills from tax preparers. In his 1993 book, Costly Returns: The Burdens of the U.S. Tax System, Payne assembled data from the IRS and other sources—public and private—and arrived at a startling conclusion: For every tax dollar collected and spent, Americans pay an additional 65 cents in collection and compliance costs!
Think about that. "If taxes are raised $10 billion to pay for another spending program," explains Payne, "then an additional $6.5 billion in tax system costs is incurred." That’s not much bang for the bucks. If Americans realized this, says Payne, the result would be "a profound effect on how we think about government and government programs." Also, it undoubtedly would stimulate renewed discussion about alternatives such as the flat tax.
A flat tax offers many benefits over the current system, but simplicity may be its strongest suit. It would put in place a system that taxes all income just one time at one low rate. It would replace confusion and corruption with clarity and fairness. If politicians did not muddy it up by rewriting it every few years according to power shifts and special interests, it would make the tax code infinitely less arbitrary and unpredictable.
Taxes should be simple and clear, not beyond the comprehension of average citizens. If the burdens of the federal income tax threaten to flatten you this month, perhaps it is time to think about how to flatten it.
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