Over the last couple days, a few people have written diaries on the Federal Tax Reform proposed by the "President's Advisory Panel". They haven't got a whole lot of attention, and given yesterday's democratic rebirth, its not surprising. I originally wrote this as a comment attached to one of the diaries yesterday, and it was off the board by the time it was finished. But there are some meaninful political issues within these proposed changes that require some analysis.
The whole report can be viewed here in a series of pdf files.
There are two different proposals that have been made, one entitled the "Simplified Income Tax Plan" and one the "Growth and Investment Tax Plan". They're similar in many areas. Where they're different, I've attempted to identify the difference, and added some analysis to most sections.
Repeal of Alt. Min. Tax. - Tax break for the rich. The whole idea of the AMT was to make sure that very high income people didn't get away without paying a reasonable amount of tax. It could have very easily stayed in place, and adjusted and indexed for inflation so that middle income taxpayers don't get hit with it, just because they live in high tax states. So this benefits many, but specially a
benefit for high income taxpayers. It does, however, become a moot point for many taxpayers, as state taxes will no longer be deductible anyway. (See below)
Combining Exemptions, Standard Deduction and Child Tax credit into a single credit: It makes things simpler. It also is a benefit for high income taxpayers, because currently, all 3 of these are phased out at higher income levels. I didn't see any recommendation for a phase out of the new Family Credit.
Earned Income Credit replaced with Work Credit: No opinion yet. Probably not a benefit for high income taxpayers.
Marriage Penalty reduced: Its about time.
Home Mortgage Interest Credit: While not entirely unreasonable, it pegs limits on the credit to average housing costs, but has a top limit of a credit based on a mortgage of $412,000. This is grossly unfair to residents of regions of the country where average housing costs exceed this amount. It does, to a certain extent, level the playing field. The credit is 15% of interest paid, meaning that taxpayers in all brackets will have identical tax benefits to identical mortgages. (I'd prefer that they just had the balls to say that there is no overriding purpose for the government to subsidize homebuilders and do a complete phase out of home mortgage interest deduction, over say, a 20 year period.)
Charitable giving: Everyone gets to deduct contributions in excess of 1% of their income. Finally (and again) permits this deduction to everyone, not just those who itemize their deductions (which, btw, disappears with these recommendations)
Health Insurance: Deductible (essentially ) for everyone, within very reasonable limits. Good idea. Absolutely assanine place to leave it. We get tax benefits for buying insurance against medical costs, but if we can't afford the insurance and actually have to pay the costs out of our pocket, those costs arent deductible. That's just fucking moronic. Subsidize medical insurance, but don't subsidize hard out of pocket medical costs. Idiotic. Somebody isn't thinking. Wonder who that is.
Education: blah blah blah. No obvious big help here. No real opinion yet.
State and local taxes : No deduction. Idiotic. Screwed up. Specially for those that live in high income and property tax states. You earn the income, have to pay the state tax, and then have to pay federal tax as well, even on the state tax that you don't get to keep because the state already took it from you. I could probably be convinced otherwise on this one, but I'm biased. I live in a high state tax state. I probably wouldn't feel the same if i lived in a no income tax state.
Retirement plans, health savings plans, education plans: blah blah blah. Looks like it strongly encourages savings. Needs more review for specific opinions. In general, good plan. But mad motivation. Ties in with Bush's desire to eliminate Social Security. Get people to save on their own, and do away with federal programs.
Dividends received: Under 1 of the plans, they're tax free if paid by domestic companies. Taxed at 15% under the other plan. In theory, I kinda like this. Corporate dividends have already been taxed once. It is unreasonable that they get taxed again when they're paid out to shareholders. Forget about big corporations for a moment. You own your own little company and earn a profit and pay 35% corp. tax. Then you pay out a dividend and pay taxes again at the personal tax level. That sucks. On the other hand, if you had a good accountant, you wouldnt have paid that tax at the corporate level to begin with, you'd have found a way to only pay tax on it once. This is a huge benefit for high income taxpayers. My prior approval notwithstanding, this is typical Bush crap. If anything is gonna change, rich people will pay less.
Capital gains received: Under 1 plan, its taxed at a rate ranging from 3.75% to 8.25%. Under the other plan, its taxed at a maximum rate of 15%. See my comments above about Typical Bush crap. (That said, there is a strong economic incentive for giving capital gains a tax break. I have neither the time nor the inclination to go into it now. If someone questions it, maybe I'll go into it in comments) Again, benefit for high income taxpayers.
Interest Received: Under one plan taxed same as other income, under another plan, taxed like dividends, at a 15% rate. See Bush crap above. (To spur savings for the low and middle class, I'd much rather see something along the lines of very low, maybe even zero tax on the first say...$1000-$5000 of interest and/or dividends. Someone with $50,000 a year in interest and/or dividends gets some of that benefit, but most of their income is taxed same as wages) Notice a theme here? Big benefit for high income taxpayers.
Taxability of Social Security: Replaces one of the most complex calculation in the current tax code with a simpler one. People with lots of retirement income pay tax on their SS benefits. People with lower income don't.
I havent addressed the tax proposals for businesses here. If someone wants it, and no one else has, I'll read up on it over the next couple days and post on it.