Flat tax

From time to time, I hear people pushing for a flat tax, trying to argue that it would be fairer than the current income tax code. Flat tax is actually regressive. Unfortunately, it's far from perfect and in any real-world incarnation would be a lot worse than the current code on at least two key dimensions: fairness and fiscal. It's a highly regressive tax that would mean the loss of gobs of revenue. Moreover, its simplicity is a ruse.

The thing that complicates the tax code is not the number of rates. It's the myriad ways in which we define different types of income. It's all the preferences, deductions and credits. Now, you might argue that a flat tax will get rid of those, but all that tells me is that a) you don't know the tax lobby, and b) you're one of the few people who's not running for president.

I deduce 'b' from the fact that I find it extremely hard to envision a viable candidate who tells people that she's going to get rid of the mortgage interest deduction. Or, if she's a Republican (or a Wall Street-oriented Democrat), that she's going to get rid of tax preferences for capital gains, dividends, and the interest-based financing that's the mother's milk of private equity investors.

The regressivity of the flat tax is another big problem. Our current federal income tax code is progressive (rates rise with income), and every distributional analysis I've ever seen of a flat tax shows a transfer of the tax burden from the wealthy to the middle class. According to the Tax Policy Center's score of the Perry tax plan, the tax bill of families with incomes between $30,000 and 40,000 would go up by about $450, while that of millionaires would fall by about half a million bucks.