How a Flat Tax Would Kill Jobs

How a Flat Tax Would (Ahem) Kill Jobs

By Rick Newman | US News – 4 hrs ago...

It seemed inevitable that the flat tax, an old Republican standby, would surface in the presidential campaign. And now we have not one leading GOP candidate, but two, whose economic plan hinges on a flat tax.

Texas Gov. Rick Perry wants to give taxpayers the option of filing under the current system or choosing instead to pay a 20 percent flat tax on their income. The latter choice, he says, would be so simple that it would take taxpayers only a moment or two to fill out a form the size of a postcard. Perry hopes this populist idea helps energize his flagging campaign.

[See 10 ways Romney and Perry differ on the economy.]

Former pizza-chain CEO Herman Cain has made a flat tax--two of them, actually--the centerpiece of his celebrated 9-9-9 plan. Two of those 9s represent the tax rate Cain would impose on corporate and personal income, with the third representing a new national sales tax meant to make up the difference for the revenue lost from businesses and individuals. This simple formula has resonated strongly with voters, propelling the once-fringe candidate to the top of the polls, right next to former Massachusetts Gov. Mitt Romney.

The basic idea behind the concept of a flat tax is that it would dramatically simplify the tax code, eliminating most deductions, loopholes, tax breaks, and other arcana that require "an army of lawyers and tax accountants" to figure out, as Perry said in his economic plan. Perry has cited a Tax Foundation report that pegs the cost of "tax compliance" at nearly $400 billion this year, nearly as much as President Obama wants to spend on his latest jobs plan. So simplifying the tax code, theoretically, would cut back on compliance costs and put more money into the pockets of ordinary taxpayers.

But tax accountants and lawyers are people too, or at least they're working folks who hold jobs and contribute to the economy. And the enactment of a flat tax could plausibly be labeled as a "job-killing" plan, the same epithet Republicans have applied to Democratic priorities such as Obama's healthcare overhaul. In other words, it would benefit one group of Americans but threaten the livelihood of another group.

[See why the GOP's "job creators" are hard to find.]

About 60 percent of taxpayers use commercial preparers to help file their taxes. Data from the IRS suggests there are about 800,000 people in the business of helping people prepare taxes. Edward Karl, vice president of taxation for the American Institute of CPAs, estimates that about 200,000 of those preparers are certified public accountants. Those are well-trained professionals with average pay of about $60,000, according to the Department of Labor--supposedly the kinds of high-paying, white-collar jobs we want to keep in America, not the kind we want to eliminate.

Many Americans probably wouldn't mind putting a few lawyers out of work, but only a small proportion of the 800,000 tax preparers are lawyers. Instead of run-of-the-mill preparation work, tax attorneys tend to work on more complex problems, including long-term financial planning, for wealthier families and businesses. So they'd probably remain employed.

The majority of the people who'd be thrown out of work under a flat tax are commercial preparers who don't have an accounting degree but are still qualified to fill out tax returns. That would include workers at companies like H&R Block, the tax-prep chain, which has about 8,000 full-time employees plus nearly 100,000 seasonal workers it takes on during tax season. Other tax preparers operate local franchises or mom-and-pop storefronts--small businesses, that is.

[See why Herman Cain's economic plan has merit.]

Neither Perry nor Cain has estimated how many people in the tax industry might lose their jobs under a flat-tax plan, but it's generally a zero-sum proposition: For ordinary taxpayers to save money from a flat-tax, then tax preparers have to lose money. That's similar to the problem with a lot of Democratic ideas that Republicans oppose, such as more infrastructure spending. To a large extent, these would merely be money transfers from one group to another. There's often a multiplier effect that suggests money spent one way brings a higher return than money spent another way, but that usually becomes a battle of statistics and projections that rarely produces agreement.

Still, people in the tax-prep industry don't seem terribly worried. Various Republicans have been pushing a flat tax for decades, yet it's never gained more than marginal support. The biggest problem with a flat tax is that it generally favors the wealthy, since their taxes would fall by the most under a 9 percent or a 20 percent flat-tax rate. Taxpayers at the bottom end of the scale might actually end up paying more--hardly a winning idea at a time of high unemployment and growing hostility toward the nation's top earners. And the federal income tax is just one part of the tax code, since filers must also grapple with state and local taxes. Millions of people who run a small or home-based business need help just to figure out what their taxable income is.

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Besides, the U.S. tax code tends to revert to complexity, no matter how strong the desire for a simpler system. The 1986 Reagan tax reforms, for instance, produced a simpler tax code with fewer deductions, and were generally popular. "In the 25 years since then," says Karl, "there have been thousands of changes." The only tax rates that ever stay flat are the theoretical ones.

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