Flat tax ideas are flat-out wrong

It sounds too simple to be true, and it is … a postcard-sized tax return.

The current 1040 uses only one line for the tax lookup, so why is everything so complicated? The answer is that Congress has made such a mess of the calculation of “income” that it drives everyone nuts, including tax professionals. Despite rumors that professionals thrive on complexities, they prefer generally accepted accounting principles (GAAP) in calculations … instead,

forced to maintain several sets of books for financial purposes and tax purposes. Here’s what happens. One Congressman proposes some “racy” depreciation rules to stimulate the economy. Another Congressman proposes a separate “alternative minimum tax” (AMT) calculation so nobody gets away tax free.

Tax software programmers (I was one of them) have to provide for five or more depreciation calculations for the same asset: GAAP, federal regular tax, federal AMT, state regular tax, state AMT. Are we having fun yet?

When someone proposes flat income tax, ask “Flat tax on what?” The answer is always “income”, easy from the standpoint of a salaried worker, not for businesses. Should “taxable income” be the same as “gross income”, without ANY deductions, not even for the cost of goods sold (CGS)?

How expensive would cars become if dealers had to pay flat tax on the full sales price? If only the CGS is allowed, what about business rents, utilities, wages and salaries paid? Flat-tax proponents never properly address these issues, lest they face the fact that their overly simplistic postcard idea would merely create another set of complexities.

Aside from valid arguments that flat taxes are highly regressive, I contend that the answer to tax simplicity is not flat tax, but resurrection of the 1954 Internal Revenue Code, slightly modified and indexed for inflation, as the foundation for tax reform.

James M. Donovan, CPA (retired from active practice)

Waikola