With tax snafus scalping Tom Daschle and Nancy Killefer—and Treasury Secretary Tim Geithner narrowly escaping a similar fate—the Obama administration has hit its first rough patch.
From Zoe Baird to Linda Chavez, we’ve seen this movie before. The tax code’s complexity (and, sometimes, the nominee’s laxity) invites gotcha politics. Even otherwise-honest filers can make career-crushing mistakes. The silver lining is that maybe Democrats will now embrace tax simplification as change they can believe in.
We haven’t had a serious tax-simplification effort since Reagan. There are famously more words in the US tax code than in the Bible, while Americans spend 200 million hours and $2 billion deciphering their tax documents each year.
The Obama campaign actually proposed a significant tax simplification crafted by its excellent but largely out-of-sight chief economic adviser Austen Goolsbee from the University of Chicago (who is now sitting on the Council of Economic Advisers). I saw Goolsbee speak at a briefing during the convention in Denver, where he laid out a compelling vision for a system where an estimated tax bill was automatically delivered to every American with simple direct income based on data the IRS already has in its files from banks and employers. Citizens could either verify, sign, and file and get on with their life—or file with an accountant to seek more deductions.
This would at least remove the hassle-factor of taxes for many Americans—although, granted, it would not clear up the thorny question of paying Medicare taxes for a driver of a car that has been given to you as a gift by your some-time employer.
The most obvious but still-unlikely solution to these tax fiascos would be a flat tax: Close the loopholes entirely, stop efforts to game the system, make taxes just about revenue generation. This would not just simplify the system and lower marginal rates for most taxpayers, but increase revenue because so much income is questionably but successfully deducted by wealthy citizens who can afford clever accountants. Fiscal conservatives like Steve Forbes and Stephen Moore have fought for this concept, first fleshed out by Robert Hall and Alvin Rabushka at the Hoover Institution and first proposed on a presidential campaign by California Democrat Jerry Brown in 1992.
There are variations on this theme. During the primaries, when I was working on Rudy Giuliani’s campaign, he proposed a Fair and Simple Tax Form—the FAST form—that would return tax forms to one-page, as it was when the income tax was introduced in 1913. It was three rates—30 percent, 15 percent, and 10 percent—preserving only basic deductions like mortgage interest, charitable donations, the child tax credit, as well as state and local taxes.
The idea was to offer a graduated flat tax, so that the Steve Forbes’ of the world would be paying a higher rate than the lower-middle-class family who makes $43,000 a year (when federal income taxes kick in). Additionally, such a flexible, graduated system would not compound the mortgage crisis while charities would not have the revenue rug pulled out from under them at a time when we’ll need them even more than in recent years.
This is not an outer-limits idea—the flat tax has been successfully implemented in more than 20 countries, particularly the former Soviet bloc countries of Eastern Europe, where Milton Friedman looked pretty good after Karl Marx.
But here in America, the argument is essentially about clarity and simplicity. The Obama administration can address these problems not just through presidential apologies but by proposing its own new policy—a dramatic tax simplification that will improve the quality of life for taxpayers while keeping the door open for essentially honest but imperfect people who want to serve their country. Until the tax code is simplified we can expect this and future administrations to be stalled by more tax snafus. And you know what snafu stands for: Situation Normal, All Fucked Up.