"The Mother of All Tax Reforms"
Let’s start with the obvious: The tax plan rolled out today by House Ways & Means Committee Chairman Charlie Rangel (D-N.Y.) is not the “mother of all tax reforms,” the congressman’s claim notwithstanding.
However, it would do some pretty big things, such as eliminating the Alternative Minimum Tax, raising individual rates, cutting corporate rates, and slashing tax benefits for big multinationals. But it largely ducks a whole host of major issues, especially how we should tax savings vs. consumption and the tax treatment of health insurance.
What I like about the plan:
1. It puts tax reform back on the table. The last time the idea was part of the policy conversation was two years ago, when President Bush’s Advisory Panel on Federal Tax Reform issued its report. The ideas raised by that group may have grown to become the true mother of all tax reforms, but Bush strangled them at birth. With the Chairman of the Ways & Means Committee signaling his enthusiasm for the issue, we may be starting a new discussion. Not this year, and probably not next year. But perhaps in 2009.
2. It gets rid of the AMT in a more or less fair way—by raising rates on the upper-brackets, including those most likely to get hit by the AMT today. Somewhat higher rates in return for AMT relief will be a good deal for most.
3. It increases the standard deduction by $850 for joint filers. It is about time.
4. It slashes the corporate rate from 35% to 30.5% and closes some tax loopholes.
5. It dumps the domestic production deduction which was adopted as part of international tax “reform” a couple of years ago. It is past time to set this dreadful provision afire and float it out to sea.
What I don’t like:
1. The way AMT relief is funded. Instead of simply raising rates, Rangel creates a “replacement tax” on adjusted gross income, which includes a lot more than what we now consider taxable income. This makes some sense because this broader base would capture income that tax code now misses, but it can get pretty complex. Worse, Rangel’s plan would restore the phase-outs of itemized deductions and the personal exemption (so-called Pease and Pep). If he wants to raise rates on rich people, I wish he’d just say so.
2. It is too timid when it comes to closing loopholes. No fewer than 32 tax “extenders” would live for yet another year. The biggest tax expenditures, such as employer-sponsored health insurance and mortgage interest, are untouched.
3. By widening the gap between corporate and individual rates, the plan creates lots of new opportunities for tax arbitrage by the super-rich.
The plan is a good start. After all the knee-jerk opposition dies down, I hope Republicans eventually take Rangel up on his offer to start talking about broad-based reform.
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According to its advocates, the FairTax is truly magical, a tax that is paid by no one. It is too good to be true.
The FairTax is a sales tax, not unlike the taxes levied by most states, but it would require much, much higher tax rates. The President's bipartisan tax reform panel concluded that a national retail sales tax would require a rate of at least 34 percent (and probably much higher) to replace the income tax alone. Income taxes are less than 60 percent of total federal tax receipts, so the FairTax, which is intended to replace all federal taxes, would require truly astronomical rates. There would be a huge incentive for tax evasion.
Sales taxes tend to be regressive, because spending declines with income. Low-income people spend all (or more) of their income. People with incomes over $200,000 spend less than 40 percent of their income on average. That is, a sales tax exempts more than 60 percent of the income of those at the top, providing them a huge tax cut. The FairTax protects low-income people with a subsidy–called a “prebate.” So if low-income people are held harmless and those at the top get a large tax cut, simple logic indicates that the middle class pays much, much more in taxes.
It is no wonder that the President's panel rejected it. (Besides for the complaints raised above, they were skeptical of administering the prebate, a new $600 billion welfare program.) Even conservative Bruce Bartlett, a fan of consumption taxes and smaller government, thinks that the FairTax is a seriously flawed policy and its advocates disingenuous at best.
Our tax system desparately needs reform, but the FairTax is not the answer.
There is no reasonable equity of distribution under the current INCOME tax system. What's more, the income tax code has become a tinkerer's paradise for 53% of the lobbyists who game it in Washington DC. It's a lucrative business, and the U.S. TAXPAYER pays for ALL of it in higher prices (a hidden tax which is incomprehensible to the average working person).
Prices AFTER FairTax would look SIMILAR to prices BEFORE FairTax – NOT 30% HIGHER – as opponents contend; competition would see to it. The FairTax rate on new items would be 29.9% (on the new, reduced cost of items because business isn't taxed under FairTax – thus lowering retail prices by 20% to 30%), or 23% of the “tax inclusive” price tag – this is the way INCOME TAX is figured (parts of the total dollar).
The effective tax rate percentages, that different income groups would pay under a FairTax consumption tax, are calculated by crediting the monthly “prebate” (rebate of tax on necessities) against all likely monthly spending of citizen families (1 member, and greater based on figures established by the Dept. of HHS – a single person receiving ~$200/mo. A family of four receiving ~$500, in addition to family earners receiving their WHOLE paycheck). Prof.'s Kotlikoff and Rapson (10/06) have concluded,
(From study: snipurl(dot)com/kotcomparetaxrates ) “…the FairTax imposes much lower average taxes on working-age households than does the current system. The FairTax broadens the tax base from what is now primarily a system of labor income taxation to a system that taxes, albeit indirectly, both labor income and existing wealth. By including existing wealth in the effective tax base, much of which is owned by rich and middle-class elderly households, the FairTax is able to tax labor income at a lower effective rate and, thereby, lower the average lifetime tax rates facing working-age Americans.
“Consider, as an example, a single household age 30 earning $50,000. The household’s average tax rate under the current system is 21.1 percent. It’s 13.5 percent under the FairTax. Since the FairTax would preserve the purchasing power of Social Security benefits and also provide a tax rebate, older low-income workers who will live primarily or exclusively on Social Security would be better off. As an example, the average remaining lifetime tax rate for an age 60 married couple with $20,000 of earnings falls from its current value of 7.2 percent to -11.0 percent under the FairTax. As another example, compare the current 24.0 percent remaining lifetime average tax rate of a married age 45 couple with $100,000 in earnings to the 14.7 percent rate that arises under the FairTax.”
Further,
(From study: snipurl(dot)com/kotftmacromicro ) “…once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohort. Under a 23 percent FairTax policy, the poorest members of the generation born in 1990 enjoy a 13.5 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 26 percent improvement in their well-being. For middle class members of this birth group, there's a 12 percent welfare gain. And for the richest members of the group, the gain is 5 percent.”
Methinks it's well past time to scrap the tax code ( snipr(dot)com/scrapthecode ) and pay for government the way that America's working men and women are paid – when something is sold.
(Permission is granted to reproduce in whole or part. – Ian)