Dugan Barr: The Seductive Song of the Flat Tax

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It seems like some kind of flat tax is the hobby horse of many politicians this year.

I have to admit that it sounds good. Everybody pays 10 or 15% of their income above a certain level. Below that level you don’t pay anything. The idea is it is easy. All deductions and special favors are gone. You pay 10% or 15% of what you received for your work or for your business. No shenanagins.

Absolutely fair for everyone, right? No deductions. No tax credits. No fancy boats written off. No trips written off. Everyone pays the same. One Republican candidate says the new tax code would be three (3) pages long. Those three pages would tell you everything you need to know about your obligation to Uncle Sam.

Of course, this is all unadulterated Bull-Bleep. The idea of a flat tax, where everyone pays the same, sounds just wonderful until you think about the issues. Unfortunately, the issues are quite complex and do not lend themselves to simple solutions. The percentage of your income that is taken in tax is important. However, what is much more important is how income is defined. Depending on which politician you’re listening to, the proposal is to make the income of everyone subject to a 10 or 15% tax. That would, they say, rid us of all those loopholes and special treatments that make the present system so unfair.

Let’s take a closer look at that. Let’s take a person who lives in Redding but works in Palo Cedro. His co-worker lives in Palo Cedro. They work at the same place earning $20/ hour for 40 hours a week. They each make $800/ week. If there were a 10% flat tax, they would each pay $80/ week in taxes. They each would have $720 a week to spend however they want. Right? Wrong. The guy who lives in Redding has to drive 100 miles every week back and forth to work. He has to buy gas, tires, oil changes etc to get to work that the Palo Cedro guy does not have to buy, so they are not equal. The Palo Cedro guy has much more discretionary income unless an adjustment is made to keep it equal. How do we do that? We let the Redding worker deduct the expenses he has to go back and forth to work from his income so he doesn’t pay taxes on the money he spends to get to work.

Suddenly, we have deductions so the Redding worker only pays taxes on what he gets to keep, just like the Palo Cedro worker does. Deductions are a slippery slope.

Suppose one of our workers gets a General Contractor’s license and gets a contract to build a house. He has to hire some help. Does he pay this flat tax on whatever he gets paid to build the house? Say it is a $250,000 house. Does he pay $25,000 in taxes because that is 10%? What about the cost of materials? Can he deduct that? Can he deduct what he paid for labor? If he has a bookkeeper to help him keep track of costs and to make sure all the bills are paid, can he deduct those wages? If he can’t, doesn’t he have to bump up the cost to cover those taxes? Especially if at the end of the day, he wants to feed his family? That would add 10% to the cost of every house our contractor builds.

The list goes on and on. What does Safeway pay taxes on under this plan? 10% of gross income? Gross income less cost of goods sold? What about wages for checkers and stockers and baggers? Does Safeway get to deduct those costs? Equipment wears out. What about that?

The fact of the matter is that all of these flat tax ideas are basically dishonest. They make something that is very complicated sound simple.

In some respects, the flat tax is like dealing with cancer. How, you ask, do you deal with cancer? “Simple” I reply. “Just cure it”. The solution is easy. Just cure it. Finding the cure is the tough part, and it is the part the politicians brush over. Just tax net income after justifiable expenses. The tough part is figuring how to decide what are and are not justifiable expenses, especially with special interest groups clawing at that definition.

A primary reason why our Internal Revenue Code is so long and complex is because there are legions of tax lawyers and accountants who are trying to find ways to minimize the taxes paid by their clients. If you think a flat tax will fix that, you are not paying attention.

* In the interest of full disclosure, I do not offer tax advice, nor do I represent clients in tax issues.

Dugan Barr
Dugan Barr has practiced law in Redding since 1967, primarily in the areas of personal injury and wrongful death. He has tried more than 200 civil jury cases to verdict. He is married and has five children. He can be reached at Barr & Mudford, 1824 Court St., Redding, 243-8008, or dugan@ca-lawyer.com.
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12 Responses

  1. Avatar EasternCounty says:

    Shining a light on the vagaries of the flat tax makes a sales tax on everything but food more attractive.

  2. Avatar CoachBob says:

    I’ll take a value-added tax idea any day over most any other.

    • Avatar A Brady says:

      The inequities of VAT tax can be highlighted by asking folks in Australia.

    • Avatar name says:

      a VAT or GST tax is not a good way to go.  Once it is installed, the only way to go is up.  It is a very easy and temping thing to raise once in place (ask almost any country in the Eurozone).  Also, it hurts the lower income people the most (someone earning $12,000 per year pays the same tax as a person earning $250,000).  As a tax on consumption, it discourages one of the key components of the USA GDP/economy.  It also would encourage more black market transactions, buying via the Internet, buying through a business, buying wholesale. etc.  There are too many negatives associated with such as tax that more than offset any benefits.

      Dugan – good observations regarding a flat tax…

       

  3. A. Jacoby A. Jacoby says:

    Well, I learned something and all before  the sun is up! Thanks for raising questions an informed electorate needs to ask.

    BTW, I drive to Cottonwood two days a week to give music lessons. I am told that I cannot deduct the cost of transportation to and from work (it’s my choice to live so far away) only if I drive between locations once I am at work. I’ve been told that by two different preparers so I am taking the as a fact. I also realize that you were giving that example only as an illustration of a point.

    thanks for the info . . .

    • Avatar David R. says:

      This article shows the author’s lack of understanding, and just how unqualified Mr. Barr is at making his argument. As A. Jacoby previously mentioned you cannot write off commuting expenses.

       

      According to the IRS: “Commuting expenses. You cannot deduct the costs of taking a bus, trolley, subway, or taxi, or of driving a car between your home and your main or regular place of work. These costs are personal commuting expenses. You cannot deduct commuting expenses no matter how far your home is from your regular place of work.” – https://www.irs.gov/publications/p463/ch04.html

  4. Avatar Virginia says:

    Where you live vs where you work is your choice.  Not a good analogy against flat tax.

    For income for a business is the net not the gross at any time.

  5. Avatar A Brady says:

    I thought we dispelled the myth of the flat tax with the demise of the Herman Cain presidential candidacy of 2011? His 999 plan went down in flames along with his campaign.

  6. Avatar Grammy says:

    Mr. Barr you always were the voice of common sense.  Now if someone would write a easy step by step way to deal with the Medicare medicine part.  Step one-call Medicare and tell them what you want to do.  They are a lot of help when you get the right person.

  7. Avatar CoachBob says:

    Sorry, I like a flat tax for one primary reason: Those that don’t pay now (avoiders) will always be paying when they purchase something. And, the absurd argument that someone on lesser income has to pay the same as someone with a higher income? So what? That happens now with state sales tax. We all pay the same no matter our income. Hmmm? Value added tax?

  8. Avatar CoachBob says:

    Shoulda added that the gov’t will make considerable income from those that don’t pay now…the cheaters. I feel the same about PL&PD insurance. Forced by the state to carry it, the state should provide it for all. Simply at the gas pump. When you consider how many Californians do not carry insurance they would now be forced to at the pump. Simple. Then, when you’re in a fender-bender, both are covered for repair period (assuming the limits are exceeded). IMO

  9. Avatar wisa says:

    “For every complex problem there is an answer that is clear, simple, and wrong.”
    H. L. Mencken