Thursday, October 27, 2011
A flat tax, like the 20% one proposed by Republican Presidential candidate Rick Perry, is not as simple as it may sound – despite how simplistic his one-page (not quite a postcard) “Sample Tax Return” appears.
Under Perry’s flat option, one begins with “everything is table” and adds “except Social Security and Railroad Retirement benefits, qualified dividends, and long-term capital gains”.
Or does it begin with “everything that is currently taxable continues to be taxable” except Social Security and Railroad Retirement benefits, etc? I expect that is where it would begin.
The “Sample Tax Return” that Perry has suggested would need more than just one line for “Your 2014 Income”. What makes up this income? W-2 wages, interest (currently taxable and exempt, or just currently taxable), net income from self-employment, rental income, income from partnerships, S-corporations, and estates, short-term capital gains, alimony, etc, etc, etc? And would these categories of income continue to be taxed as they currently are?
There would need to be a page 2 to identify the sources of “Your 2014 Income”. And we would still need Schedules C, D, E and F to report the income. Or does Perry mean gross income from all sources is taxed, with no Schedule C, E, or F deductions? And a Schedule SE would be needed to report the self-employment tax. Unlike Cain, Perry does not mention abolishing the FICA payroll tax, so I expect he also means to continue the self-employment tax.
He then goes on to say “nothing is deductible” and adds “except mortgage interest, charitable contributions, and state and local tax”. Is that mortgage interest on your primary principal residence only, or also on a second personal residence? Is there a cap on the principal amount on which mortgage interest can be deducted? Is mortgage interest limited to interest on “acquisition indebtedness”? And does “state and local tax” also include real estate tax, which is a local tax?
Presumably there would be no deductions for alimony paid, retirement plan contributions, self-employed health insurance premiums, ½ of self-employment tax. Or are these deductions, currently allowed “above the line” to be included in the determination of “Your 2014 Income”? Is Perry’s “Your 2014 Income” the same as the current Adjusted Gross Income (AGI)?
These are all questions that need to be answered.
So you see – a flat tax, while certainly infinitely simpler, and “more better”, than our current mucking fess, is not necessarily simple.
Perry’s flat tax system, even if it is the only system and not an “option” as he stupidly suggests, would not put tax professionals like me out of work. We would still be needed for the supplemental schedules C, D, E, F, and SE.
As I have always said –
(1) Regardless of how simple the tax return is taxpayers will still seek out a tax preparer to avoid the inconvenience of preparing it themselves, and
(2) I would make more money, experience substantially less agita, and have limited GD extensions if I did nothing all day during the tax season but complete a Form 1040A or 1040EZ type form.
Once I have completed the remaining 2010 GD extensions I will, as previously promised, compile my proposed new Tax Code into an outline and make it available.