Flat Tax

So here's the thing with a flat tax, it doesn't actually make filing taxes all that much simpler.

Most people already have a pretty simply tax situation. They earn money from their job, which gets reported to the IRS. In fact, for a lot of people, your state and the IRS could just send you a bill based on the information that's given to them on your W2 and 1099 forms. Some states have even tried doing this. Of course, companies like H&R Block spend considerable lobbying dollars to stop this from happening broadly.

The complexity in the tax code, lots of it is someplace where it can't be so easily eliminated, which is in defining what income actually is for businesses or for people with more investments and wrinkles in their earning picture.

I have a relatively simple business to keep track of, I take money, I send most of it on to clients, but then there are still a lot of rules and will always be a lot of rules for just what amount of the rest of it is an expense. As an example, the government has decided that entertainment costs are only 50% deductible so that there is a disincentive to business owners to have the government subsidizing those famous three martinis at a three martini lunch. Health insurance is a fully deductible business expense, some people think it shouldn't be. If you spend a gazillion dollars buying assets that will last a gazillion years we have depreciation schedules and exceptions thereto. There isn't a great way for flat tax to just do away with all of these rules that we use to determine what the word "profit" means. For a lot of my clients, who are self-employed writers, a flat tax isn't going to be an easier tax, there will still need to be some form of Schedule C, you'll still need to save those receipts, deal with a home office deduction, maybe. And very few people who benefit from various of those things like a home office deduction will be eager to see those things eliminated in the interest of simplicity. Even if you might end up with less tax being paid in the end, all you'll see is that your little special deduction is going away, and you'll be opposed.

The first Sookie Stackhouse novel DEAD UNTIL DARK was published in 2001. The cover price was, I think $5.99 or $6.50. It's currently $7.99. Let us say hypothetically that Barnes & Noble ordered 2000 copies of the book in 2001, and that over the ten years since B&N has never had fewer than 500 copies sittling on its shelf. So which 500 copies are sitting on the shelf? Copies that were ordered in 2001 at $6.50, or copies ordered in 2011 at $7.99?

That's a complication in the tax code. If B&N can say for tax purposes that it has always had 500 copies purchased ten years ago for $6.50 sitting on its shelves, which is known as "last-in first-out" or "lifo" inventory, it gets to reduce its profit for tax purposes, because its cost for the books that are selling is based on a $7.99 price instead of a $6.50 price. That's approximately $.75 for each of those 500 books, or around $350, that B&N has made in the real world (there are not many or any first printing copies of Dead Until Dark sitting on bookstore shelves) that it hasn't made for tax purposes.

Tax complexity! Can you use "lifo," or do you use "fifo" where the goods you sell are always the goods purchased or made first, or do you use "dollar cost averaging" where you use the average price?

There are all kinds of decisions that businesses have to make that are like this, where you can do or say one thing or another and end up with a different tax bill.

The $375 profit B&N might be deferring on Dead Until Dark doesn't seem like much, but pretend you are an oil company with big tank farms that can hold huge amounts of gas, and you can say those are filled with old gas that you purchased for $23 a barrel or new gas that you purchased for $86 a barrel. I have no idea how big a huge gas tank in a tank farm is, but if you're talking 100,000 barrels with a $63 price difference, that's an awful lot of swing to your taxable income.

This is where the loopholes lurk in the tax code, where the unfairness comes in, not in the fact that it's too darned complicated to figure out how much tax you owe because you're paying 15% on the first few thousand dollars in income and 28% on the last few thousand.

Favor a flat tax, don't favor it, just don't do either because you think it's going to make the tax system simpler. A simpler tax system wouldn't come about from a flat tax, it would come about from the wholesale closing of tax loopholes. And if you like your mortgage interest deduction or college tuition credit, are you any more eager to give up that credit, than Exxon would be to give up the ability to let it decide that all the gas sitting in all its gas tanks today is gas it obtained for $23 a barrel at some point in the past?