The Fiscal Times, Flat Tax Hybrid Plans May Add Trillions to Deficit:

It sounds like a safe political gambit: Implement a new flat tax plan to simplify the federal tax code and eliminate special interest write-offs and loopholes. If Americans didn’t like it — no problem — they would have the option of sticking with the current system.

GOP presidential contenders Newt Gingrich and Rick Perry have both proposed this dual tax system, and both have been lauded for their efforts by long-time flat-tax enthusiast Steve Forbes and anti-tax crusader Grover Norquist. Perry's plan calls for a 20% flat tax rate on individuals and 20% corporate rate. Gingrich's calls for a 15% flat tax rate on individuals and a 12.5% corporate rate. The problem: Their plans could cost the government a bundle, raising the deficit even more.

Operating that type of dual tax system, which lays a flat tax option on top of the current code, is a sure recipe for revenue loss and added complications for both taxpayers and the Treasury and IRS, tax experts say.

Twenty-five countries including Russia, Lithuania, Hong Kong, and Iceland have enacted flat tax systems for individuals, but only Hong Kong makes that option elective.

But tax experts warn that this “one from column A or one from Column B” approach would be highly risky. “It’s somewhere between ‘impossible’ and ‘no-freaking way’ could a system like this realistically function in the U.S.,” said Paul Caron, a tax law professor at the University of Cincinnati and publisher and editor of TaxProf, the most popular tax blog on the internet.

One of the original flat tax advocates, Former Republican House Majority Leader Dick Armey of Texas, says that while a flat tax is “the single greatest instrument available to inspire growth in the American economy,” it’s not worth enacting if the current federal tax code remains, as Gingrich and Perry are suggesting. “It takes a lot more boldness then this,” Armey told The Fiscal Times, calling these plans “cockamamie hybrids.” “Now you’ve got to hire extra accountants who have to spend extra time figuring the tax code both ways, the old way and the flat tax way.” …

“So if you’re no longer going to tax Bill Gates on the amount he takes in and doesn’t spend, and the lower income folks will stay as is, where’s that tax going to come from? Inevitably, the middle class will end up picking up the tab,” said H. David Rosenbloom, director of the International Tax Program at New York University School of Law. …

According to estimates compiled by the Tax Policy Center, the Perry and Gingrich plans would cost the Treasury $570 billion and $850 billion, respectively, in revenue over one year—more than one-fifth and one-third of the $2.3 trillion in revenue the federal government will collect in 2011. “Their solution simply is to not raise enough revenue to support the government, meaning deficits would just mount and mount,” said Ed Kleinbard, a tax law professor at the University of Southern California and a former chief of staff for the congressional Joint Committee on Taxation. “That kind of talk may be what the [conservative political] base likes to hear at this point in the election cycle, but this is not something the right or the left could base policy on soundly….These are tax leprechauns and unicorns in terms of the extent to which the proposals are grounded in reality.”

This kind of dual-track tax system is virtually guaranteed to produce less revenue, said Stephen Shay, a tax law professor at Harvard Law School. Giving people the choice between taking a flat tax or keeping their rates and deductions will naturally lead most middle class taxpayers to run the numbers and choose the option that lowers their tax bill the most. For that reason, “any election in relation to the current system is a revenue loser assuming rational human response,” Shay said.

Hank Gutman, a principal with KPMG LLP’s Washington National Tax practice, disagrees with Forbes. “By definition, these plans will hit middle income earners who earn most of their income from wages, because that’s the only thing left in the tax base,” Gutman said. In short, somebody will have to pay more if the Perry and Gingrich scenarios drain the Treasury of hundreds of billions of dollars in revenues, as these experts are predicting.

It’s ironic that Gingrich and Perry are advertising their proposals as ways to simplify life for both the taxpayer and the government when it would almost certainly greatly complicate people’s lives, Rosenbloom and Gutman said. Perry likes to hold up a postcard to show how simple it would be to file a tax return under his system. “However you look at it, two tax systems operating side-by-side like this have got to be more complicated than one, even if some people at the top of the income spectrum are able to file their taxes on a postcard,” Rosenbloom said. The IRS , which is itself contending with budget cuts, would need to devise a new administrative structure to handle another tax plan with new bases, which would require new forms and computer programs, Gutman said. “It just adds another layer of complexity. How can this be good?”