Tax “fairness”

One part of Dr. Ben Carson’s famed National Prayer Breakfast address that captured a great deal of attention was his argument for fair taxation (by which he meant something like the Flat Tax) in the context of religious tithe, which does not scale with income or fortune, and does not seek to level punitive tax rates against the wealthy, or let anyone completely off the hook.  To paraphrase Carson a bit, it doesn’t make sense to punish someone who earns $10 million in a year and hands over $1 million of it to the government, by paying a 10 percent flat tax.  Why does society want to punish a person who paid hundreds of times as much tax as most of his fellow citizens?

There are generally two ways to collect tax: either high rates with many deductions, or low rates with few deductions.  We currently skew towards high rates and lots of deductions, not least because it allows the political class to exert control over the population through the tax code itself – which should be a fair, efficient, and simple system for collecting government revenue, not a maze that taxpaying rats are forced to run for the amusement of government officials.

But here’s a point to consider on the topic of tax “fairness”: under a system of high rates and plentiful deduction, the effective tax rate of individuals who file anything more complex than a basic 1040 or 1040EZ depends, to a large degree, upon their skill at calculating taxes.  In other words, to secure the lowest possible effective rate, it is necessary to know how to claim the best possible combination of deductions, or hire accountants to handle it for you.  Lots of people pay more tax than they really needed to, because they didn’t put together the optimum combination of deductions, or they missed a few deductions they weren’t aware of. 

How, under even the most tortured definition of “fairness,” can it possibly be “fair” for citizens’ effective tax rates to depend on how well they can game the system?