ARC's 1st Law: As a "progressive" online discussion grows longer, the probability of a nefarious reference to Karl Rove approaches one

Tuesday, November 01, 2005

Tax Reform (?)

Wait a second... I thought the whole point of the "bipartisan expert panel" was to simplify the tax code and make it easier for the average American to file their taxes. (Ideally, it would allow individuals to file their taxes on a 3x5 index card and do away with much of the IRS bureaucracy and the industry that has developed to help people comply with IRS regulations).

Well, it looks like the tax reformers are only looking to "reform" the deductions away so they can eliminate the Alternative Minimum Tax:

The advisory group, composed of two former members of Congress, former government officials, academics, and an investment company executive, recommended the Bush administration follow one of two plans.

One -- the "Growth and Investment" plan -- taxes income from dividends, capital gains and interest at a flat 15 percent rate and businesses that are not sole proprietorships at a flat 30 percent. That plan would also reduce tax brackets to three from the current six, with a top rate for individuals at 30 percent.

The current top individual tax rate is 35 percent.

The other, the "Simplified Income Tax" plan, would have four tax brackets with a top rate of 33 percent. It would allow exclusions for dividends and capital gains from U.S. firms but tax interest at regular tax rates. Small businesses would be taxed at regular rates under that approach.

MORTGAGE CREDIT

Both plans would replace the current mortgage interest rate deduction, which taxpayers can claim on mortgage debt up to $1.1 million. Instead, the panel proposes a home credit equal to 15 percent of mortgage interest paid.

A credit is a dollar-for-dollar reduction in tax, while a deduction is an amount that reduces the income subject to tax.

The panel would put the upper threshold of mortgages that qualify for the credit at the average regional price of housing -- expected to range between $227,000 and $412,000, the panel said.

"Today, less than 30 percent of American taxpayers take advantage of the mortgage interest deduction. Under our proposal, everyone who has a mortgage will get a benefit," panel chairman former Florida Republican Sen. Connie Mack said in an interview on Bloomberg Television.

Both plans would would eliminate the minimum alternative tax, a provision originally intended to insure that affluent taxpayers with many deductions would pay some taxes, but which now affects more middle-income taxpayers.

The panel also proposes eliminating deductions for payments of state and local income taxes.

In addition, both plans would cap at $11,500 the amount a family can shelter from taxes to pay for health insurance.

I'm sorry, I would not characterize going from six to four brackets as the "Simplified Income Tax Plan." What happened to the bold policy proposals of a National Sales Tax plan (with the elimination of income tax entirely) or the Flat Tax, which would make it extremely difficult to increase taxes since everyone would bear the burden of the hike?

Unless President Bush boldly reasserts these possibilities, it's likely that we'll have another "reform" plan that ends up being more complicated than the previous system. Once you start allowing Congressional leaders to tinker with this item or that item in the tax code, you end up with a huge codified mess. That is what makes the Flat Tax so appealing...

And I just LOVE the thought of a government bureaucrat formulating the average house price in a region and thereby determining the tax credit that I'd receive. Like I said - I thought the goal was the SIMPLIFY the tax code, Mr. President!?

The only way that such a mess can be fixed is to have two plans: One loaded with deductions and credits and thousands of pages of code; the other a simple flat tax. Allow taxpayers to decide which system they liked better.

The Wall Street Journal has found that the current tax code is between 2.4 million and 9 million words. Regarding the discrepancy, they make the following argument:
The larger point here is that, whichever number you pick [2.4 million and 9 million words], the tax code is monstrous. The 1986 Reagan tax reform cut the code in half, according to the National Taxpayers Union, but since then it has grown back like jungle brush, thicker than ever. A complicated tax code leads to wasted time and money as taxpayers and their advisers comply with its myriad rules. As President Bush's tax reform panel winds up its business today, we assume that reducing complexity will be high on its to-do list.

While the panel's proposals may reduce the number of words in the tax code, like Reagan's reform in 1986 the tax code will grow again into the monstrosity that it currently is unless our leaders have the courage to take us down a different path.

Your Co-Conspirator,
ARC: St Wendeler