Pres. Bush's Tax Reform Panel today submitted their final proposals for tax reform.
The following proposals are included:
- Eliminate the Alternative Minimum Tax (AMT)
- Reduce capital gains, dividends, and interest taxes
- Lower the cap on the mortgage deduction from $1 million to the average regional house price
- Reduce the so-called "marriage penalty"
- Repeal the federal deduction of state and local taxes
- Reduce the number of tax brackets
- Reduce and simplify tax-advantaged savings accounts
- Simplify tax filing
Personally, I think these proposals are better than what we would have expected from a Republican president -- a "flat tax" or a national consumption tax. They are a start. Still, so much improvement is needed.
First, I think the AMT can be eliminated if done correctly. That means taxing all forms of income equally and limiting the amount of deductions possible.
Second, all forms of income -- capital gains, dividends, interest, corporate income, etc. -- should all be taxed at the same marginial rates, period. People who earn their income through playing the stock market should pay taxes at the same marginal tax rates as those who work with their hands and their heads. The 1986 Tax Reform Act ended preferential treatment for certain kinds of income. This allowed the top marginal tax rate to be reduced from 50 percent to 28 percent, but capital gains, etc. was taxed at the same rate as individual income.
Third, the "marriage penalty" is an excuse to lower taxes, period. Nothing should be done about this.
Fourth, the federal, state and local tax deduction makes sense, and should remain intact. Unlike many other tax breaks, the federal, state, and local tax deduction is broad-based. And we should be required to subsidize another state's bridge or schools because, after all, we are all in this together.
Fifth, I do like lowering the cap on the mortgage deduction to $300,000. Leader Pelosi, who voted to lower the mortgage deduction to this amount in 1993 as part of the House Progressive Caucus deficit reduction package, sadly denounced the proposal today as "a blow to the middle class." I also like reducing the number of tax-advantaged savings accounts, which Leader Pelosi also denounced.
So here is my proposal (and hopefully the Democrats' proposal):
- Eliminate all narrowly targeted tax breaks (i.e., the child tax credit, college tuition tax credit, education savings accounts, business meal deduction, etc.), and retain only broad based tax-breaks including mortgage deduction, the state and local tax deduction, the employer health expenditures tax deduction, Earned Income Tax Credit (EITC), and charitable deductions. Other tax expenditures should have to compete with other programs in the appropriations process. I would prefer to have a means-tested government program to a tax expenditure that never has to compete in the appropriations process.
- Change the mortgage deduction to a credit. This makes the mortgage deduction more progressive, and reduces the growth of McMansions and sprawl in our country.
- Change the employer health insurance deduction to an individual tax credit to purchase health insurance. Also, allow all workers under the age of 65 to buy into the Federal Employees Health Benefits Program (or state plan). This allows Americans to have health insurance independent of their work.
- Change the charitable tax deduction to a credit to make tax code more progressive.
- Tax all forms of income (capital gains, corporate income, dividends, etc.) at the same marginal rate.
- Retain the inheritance tax for assets above $2 million for an individual and $4 million for a family at a marginal rate of 50 percent.
- Eliminate the AMT once and for all.
- Expand the EITC.
This is my proposal. Please feel free to critique it, and add something to the proposal.