The Trojan horse is no myth. Politicians offer them every campaign season.
A favorite this year is the “flatter income tax.” On the outside, it promises simplicity and fairness, virtues both. But hidden inside are serious perils.
Wisconsin proponents include vice presidential candidate Paul Ryan, Congressman Reid Ribble and State Representative Robin Vos, who may be the next Speaker of the Assembly. They use identical words to express their goal. In Ribble’s phrasing: “a simpler, fairer, and flatter tax code.”
“Simpler” is good. So is “fairer.” But “flatter” is not the way to get there.
A flatter income tax means fewer brackets. For example, Wisconsin’s personal income tax has five brackets, depending on income. Taxable income below $13,580 (for a couple) is taxed at 4.6 percent, the lowest. Taxable income above $298,940 is taxed at 7.75 percent, the highest.
Three other brackets cover in-between.
Wisconsin’s corporate income tax has only one bracket. It’s a pure flat tax. Both Wal-Mart and Chet’s Auto Service pay the same 7.9 percent of taxable income.
Is the personal income tax a lot more complicated than the corporate tax because it has more brackets? No. Complexity doesn’t come from the number of brackets. In fact, Ronald Reagan’s signature 1981 tax reform had 15 brackets. To handle brackets, just use the tables provided by the IRS and Department of Revenue.
What’s complicated is figuring out your taxable income. That’s where the tax maze — and the tax loopholes — are. Taxes are complex because of credits, deductions, exemptions, deferrals and other add-ons. Wisconsin credits range from the Angel Investment Credit to the School Property Tax Credit to the Woody Biomass Harvesting and Processing Credit.
The federal tax code has 3.8 million words and growing rapidly, says the IRS. The explanation of tax brackets takes only 587 of those words. Wisconsin’s tax code has nearly tripled in length in 25 years. One-third of today’s code is devoted just to credits.
The main road to simplicity is by cutting credits, exemptions, deductions, deferrals and whatever else. Simplifying the tax system by flattening brackets is like shortening a book just by trimming the chapter titles.
Nor does flattening a system make it fairer. Unless the flatter system raises taxes on rich people, it’s arithmetically impossible to be revenue neutral without raising taxes on the middle and/or poor.
Consider Paul Ryan’s plan, adopted by the House in its budget. It combines six current federal brackets (ranging from 10 percent to 35 percent) into two: 10 percent and 25 percent. People at the bottom get no break. People at the top do. For example, for those earning over $1 million, the average tax cut is $265,000. Whether people in the middle go up or down depends on how much revenue the new system is designed to generate.
Flatter-tax boosters say lower taxes at the top will stimulate investment, but that trickle-down argument has a poor track record. The only way a flatter system can avoid disproportionately benefiting the wealthiest is to slash total tax collections.
That’s why the call for flatter taxes is a Trojan horse. It appears to offer simplicity and fairness, while in fact it delivers tax breaks for the rich and/or slashes public investments in our future.
If those are worthy goals, then advocates should be honest about it. Don’t confuse people with talk about “simpler, fairer, and flatter.”
If we want a fairer tax system, we should start with fairer arguments.
Jack Norman is the director of Tax Fairness WI, a joint project of the Wisconsin Council on Children and Families and Citizen Action of Wisconsin
