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Tuesday, October 18, 2005

Get Yer Taxes

Not really Minnesota-related, but I love tax policy, and that means I am very interested in the President's Advisory Panel on Federal Tax Reform and their recommendations. What is super cool is that Kevin Drum over at The Washington Monthly has put together a handy chart with some of the recommendations. He's done all the hard work of amalgamating the data; I'll just add my opinions.

Abolish the Alternative Minimum Tax: I don't necessarily think this is a good idea. The AMT was created to ensure that high-wealth taxpayers don't deduct everything and end up paying no income taxes. The current AMT, which is ensnaring more and more middle-class taxpayers, definitely needs to be fixed. But there still needs to be some kind of mechanism that ensures that wealthy people pay their fair share of taxes, and don't use tax shelters and other gimmicks not available to the middle class to avoid paying.

Reduce six tax brackets to four, up the bottom rate from 10 to 15 percent, and drop the top rate from 35 to 33 percent: well, that's a tough one. Many tax brackets per se aren't bad for the tax code; calculating the amount you owe based on the tax brackets is not difficult. Is this revenue-neutral? Will this make the overall tax system more progressive or regressive? These are important questions.

Eliminate taxes on dividends and part of stock capital gains, or tax investment income at 15 percent: this is clearly an attempt to put into law the belief held by many conservatives that only wage income should be taxed, not investment income. Since the vast majority of people in this country get their money from wages, not investments, this isn't going to help the middle class. Seems to just be a giveaway to the rich. I would like to hear good reasons why these should be implemented, aside from the usual "double-taxation) nonsense.

Eliminate the home mortgage deduction: I am all for this, as I have explained before. Yes, this may have a huge impact on the housing market, but I see this as a necessary bit of turmoil that occurs when you take away artificial incentives from a market. The same thing would happen if the U.S. eliminated agricultural subsidies, something else I would like to see. Instead of a home mortgage interest deduction, programs that target low-income or first-time homebuyers would be far more effective and fair if the goal is to encourage home ownership and bring stability to communities.

Increase the capital gains exclusion for home sales to $600,000 and index for inflation: meh. I don't like such a high exclusion, but since a huge chunk of the middle class does own a home, this isn't as much of a giveaway to the rich as the investment income changes above would be. But what about people who don't own a home? Couldn't they exclude capital gains from other sources in the interest of fairness? I'm not sure. This is a tough one.

No deductions for state and local taxes: as far as I know, these deductions are only available if you itemize. Since most people don't, this wouldn't hurt a whole lot of people. I'm unsure what the rationale is behind this aside from merely simplifying the tax code, but that may be enough of a reason.

Eliminate the marriage penalty by doubling the worth of tax breaks compared to individual taxpayers: once upon a time, I believed that the so-called "marriage penalty" was fair. Now I don't. Simply doubling amounts for married couples is simple and it makes the most sense. What about head of household status? Beats me.

Treat part of employer-paid health insurance premiums as income: wow, talk about a way to hose people. It's bad enough that premiums are going up by double digits a year, that copays are increasing drastically, and that the quality of health care isn't improving. Now, employers are going to have to pay more in taxes just because health insurance premiums are increasing? Explain to me how this will motivate the government to keep down health care costs. The kind of nonsense people come up with to deal with the accounting of health care is simply an argument for national health care.

Replace Earned Income Tax Credit with a work credit: it's hard to say what the difference will be without seeing a plan, as Kevin points out. Giving people the opportunity to let the IRS calculate it would probably help low-income people who don't have the resources to complete tax forms that other people have.

Deductibility of charitable contributions exceeding 1% of income: another meh. I don't like adding another deduction when we are supposed to be simplifying the tax code, though.

Personal exemptions, deductions, and credits are eliminated and replaced by simple credits: here, again, I would like to see how this affects real tax rates. Along with the mortgage interest deduction, the child tax credit is up there with things I hate.

Replace multiple retirement savings accounts with two simpler accounts: Save at Work and Save for Retirement: holy crap, they've stolen my idea! Okay, okay, I'm not the only one to think of this, but still, the similarity is uncanny, and it's frankly about time that somebody put an idea like this forward to deal with all the retirement account options we currently have. True, I called the accounts tax-deferred and tax-exempt instead of Save at Work and Save at Retirement, but they work the same: one account is funded pre-tax and taxed at withdrawal, the other account is funded after-tax and not taxed in the future. A resounding agreement here. I want co-author acknowledgment!

Education, health, and savings tax breaks are replaced with a Save for Family account: not too happy about this one. Would this actually simplify the tax code? I'm not sure. In addition, a lot of middle-class taxpayers who can't save for college beforehand currently enjoy tax breaks like the Hope credit; switching to this system probably wouldn't cause a whole lot of people to start saving money beforehand, but it would harm a lot of people. I'm not sold on this idea.

Well. That was kind of fun. All in all, these ideas are clearly tilted towards the rich, which is to be expected given the current political climate. There are a couple of good ideas in there, though.


At 6:50 AM, October 19, 2005, Blogger halfback jack said...

I would agree that there are some good ideas in there. A couple of comments though:

* Eliminate the ability to deduct the interest on the second mortgage and it's first cousin, the home-equity loan. Allow the primary residence mortgage interest to be deducted up to a certain level (like the maximum mortgage amount that can be federally insured).

* Eliminating deductibility of state and local taxes means that you will be paying taxes on taxes. As I have said elsewhere, the instance of the property tax in Minnesota is one where the homeowner has no control over at all. Market values skyrocket and the taxes jump automatically based on computer models.

* Set a floor on taxes on dividends and investment income. For instance, the first XXX amount of dividends/investment income is not subject to tax. Above that threshold, the excess is subject to a rate of whatever percent. This would allow some protection for small investors (like me) who have a very modest portfolio. Especially if home mortgage interest is no longer deductible.

* Income tax brackets should be progressive: the more you make, the higher the bracket.

* Deductions for charitable causes needs to be handles with kid gloves. A lot of nonprofits rely on donations to provide services and if that goes (or is severely capped), those nonprofits are going to be forced to reduce services or seek significant public funding. Neither of those is a good alternative in my book, especially since the current wizdumb seems to be that nonprofits should not rely on public funding to continue and expand services.

Good synopsis!


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