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John McCain's Simpler Tax Proposal Is Actually More Complex - No Kidding

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In Spain the government collects value added tax (VAT) on exchanges between retailers and consumers. It's similar to the sales tax in that it's an indirect tax that is collected from someone other than the person who actually bears the cost of the tax (namely the seller rather than the consumer). This is gripping prose so far, isn't it? Don't worry. I'm getting to the part about McCain's proposal.

I know someone who owned a beautiful, bustling cafe near Barcelona with a large garden terrace in back. Since bars and cafes are driven mostly by small, cash transactions it isn't difficult for proprietors to fudge on their income tax. By saying they earned less they were able to avoid paying all of the VAT they'd collected from customers. My friend was not doing this (no, really) but had to suffer the consequences when the government decided to collect a fixed amount from each cafe based upon the size of the establishment in square meters. The larger your establishment the more you had to pay.

On one hand, it simplified the tax code. On the other, it ended up costing my friend about the same as she had been paying previously. Several years later however, the tax authorities allowed proprietors to choose between which calculation they preferred; the "easy way" or the "old way". What do you think happened? This is killing you, isn't it? Retailers all paid their planners and CPAs more money to determine which calculation would get them the cheapest tax bill. All in the spirit of simplification as defined by Parliament (apparently Madrid's fancy-pants word for Congress).

Well, that's not simpler!

This is similar to what John McCain proposed when he promised to simplify our nutty tax code. He didn't call it nutty. That's my word. In theory, he's got the right idea. You wouldn't believe the looks I get when I tell my foreign friends that at the moment many Americans have to complete their tax forms twice: once under the standard system, with its myriad deductions, credits and many loopholes, and again under an "alternative minimum tax" (AMT) system which offers lower rates but very few deductions. They then pay whichever of the two bills is higher. My friends are long-asleep before I finish explaining it to them.

This is CRAZY!

McCain wants to make a simpler version of our tax code by replacing the existing six tax bands with only two and to drastically reduce the allowed deductions. He hasn't said what the deductions will be and that can make a big difference so it's hard to judge his plan, but it can't be worse than the current one. The ludicrous thing is that his new plan will co-exist alongside the old one. So, like my example above, we will just have one more thing to figure out; which system will allow us to pay less, and thereby make the tax code more complex.