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As I See It

In Romania, flat tax days are here again

What does Romania know that we don’t know?

As of January 1st, Romania and the former Soviet state of Georgia joined six other European countries that have jumped aboard the flat-tax wagon.

Romania? Yes indeed, Romania.

In total, eight European countries have concluded that using a flat tax to collect revenue from businesses and individuals is better than a convoluted system of varying tax rates, deductions and exemptions.

Not surprisingly, these countries, though they’ve been around a long time, have just recently gained their independence and must now fend for themselves. The group, and their respective flat-tax rates, is composed of Romania (16%), Georgia (12%), Russia (13%), Estonia (25% going to 20% in 2007), Latvia (25%), Serbia (14%), Ukraine (13%) and Slovakia (19%).

Economics or politics?

Replacing our income tax with a flat tax has been tossed around for years.

President Bush recently appointed yet another commission to study the situation and make recommendations for converting the U.S. to this system, which is considered by many to be fairer and more likely to promote economic growth than the system we now have.

Unfortunately, abandoning our archaic system is more about politics than economics. Needless to say, it took years and years to construct our tax law. Hundreds of sections, thousands of regulations and tens of thousands of pages of commentary, court cases, rulings, etc. No one could have created such a complex mess without the help of thousands of people over decades and decades of time, all struggling toward the common goal of producing an unworkable, incomprehensible, time-consuming labyrinth of loopholes for the clever and potholes for the careless.

In the good ol’ U.S.A.

Could it happen here?

What would happen if we adopted a flat-tax system for the United States? Since we have more people preparing tax returns than serving in our army, the immediate result would be chaos, and cries of impending starvation, in the community of tax consultants. However, these are capable folks and they could get going in another line of work in short order.
Charitable organizations would scream louder than Howard Dean for fear of dwindling contributions as the tax deductibility incentive was swept away. Ditto for mortgage companies as the lure of tax deductible interest expense was eliminated.

Of course, I have always counseled that paying anything just to get a tax deduction was ridiculous, nonetheless, millions and millions of people do it every day.

Considering the opposition

Um, let’s see… charitable organizations would oppose a flat tax. Banks would fight against it. Lawyers and accountants would weigh into the fray on the side of keeping the system we have.

Do you suppose these folks, and others having a vested interest in maintaining the status quo, would lobby Congress to protect their interest? Is there any doubt? Are these groups influential? Are you nuts? We’re talking Baptists and Catholics here with Jerry Falwell and the religious right leading the charge supported by a veritable army of bankers and lawyers! Napoleon’s “fighting squares” strategy couldn’t stand up under such an assault.

What impact would replacing our tax system with a simple flat tax have on our economy? In my view, it would be extremely positive. Never underestimate the stupid decisions people make as they chase tax deductions — from CEOs to Joe Six Pack.

Clearing out all the clutter would encourage better choices based on pure economics rather than slipping one over on the IRS. Flat taxes are fairer to the taxpayers and easier to compute and collect. In fact, I can’t think of a single legitimate argument in favor of keeping what we have.

A flat tax system does not necessarily equate to lower taxes, particularly for middle-income taxpayers. Estimates range from a rate of 17% to around 20%. Devoid of home mortgage interest deductions, real estate taxes and charitable contributions, some would pay more, some less. The fairness would result from putting me and my modest home mortgage on the same tax footing with some folks of similar income and really heavy mortgages. In essence, I’m subsidizing their taxes through my choice to live modestly while the tax system rewards them for living large. Where are the Romanians when you really need ‘em?

Is there any hope? Frankly, it’s slim.

Taxpayers could ban together and demand change and get change if they yelled loudly enough, but that hasn’t happened yet and I don’t see any sign of it on the horizon. The opposition lobbyist would shift into frenzy mode and their clients are very powerful. Is it just a pipe dream? Well, we thought tort reform was just a pipe dream until last year. Who would have thought in the 60’s that we would become one of the top gambling destinations in the country? Who thought the highway department would ever finish the Madison exit?

Miracles happen.

Thought for the Moment

If you hold to my teaching, you are really my disciples. Then you will know the truth, and the truth will set you free. — John 8:31

Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at cpajones@msbusiness.com.


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