On Tax Reform

Here are the tax reforms being proposed by the tax reform committee. From the NY Times:

- The alternative minimum tax, a steep levy faced by an increasing number of middle-income taxpayers, would be abolished.

- The tax break on home mortgages would be sharply limited, especially for expensive houses.

- No deduction would be allowed for state and local income and property taxes.

- Employer-paid health insurance premiums above $5,000 a year for an individual and $11,500 for a family policy would be treated as income to workers and taxed accordingly.

- All taxpayers could deduct charitable donations, but only to the extent they exceeded 1 percent of a taxpayer's income.

- Personal exemptions and deductions and credits for children would be eliminated and replaced by a credit of $1,600 for a single person, $3,200 for a couple, $1,500 for each child and $500 for each other dependent.

- The myriad savings vehicles available now like individual retirement accounts and 401(k) plans would be replaced by three streamlined savings plans and a refundable savings credit for low-income workers.

- The six tax brackets in the existing law would be replaced by four, with a low bracket of 15 percent and a top rate of 33 percent. The top rate now is 35 percent.

- The two plans differ on the way they would treat investment income. One would eliminate taxes on dividends entirely, lower the top capital gains rate to 8.25 percent on the sale of stock in American corporations and tax interest income at the same rate as wages and salaries. The other plan would have a 15 percent rate on dividends, interest and capital gains. The rate now is 15 percent on dividends and capital gains, and interest payments are taxed like earned income.

- One of the biggest changes would be the limits on tax breaks for homeowners. Now, all interest payments on mortgage loans smaller than $1 million are deductible.

- Both plans would lower the limit to the maximum mortgage the Federal Housing Administration will insure. That level changes each year and varies depending on housing costs in each county, with a maximum loan limit now of $312,895 in communities where housing is most expensive and a national average of about $244,000.

- The commission would raise to $600,000 from $500,000 the amount of profits from home sales that would be excluded from capital gains taxes.

- Another big change would be the elimination of the tax deduction on state and local taxes.

What's my take?

The goal of the tax changes is to eliminate the AMT, but be revenue neutral. In otherwords, since removing the AMT would result in lost tax revenues, the tax commission needs to propose other ways to make that money up.

Obviously, the only fair tax is a flat tax that eliminates all deductions, and excludes some base amount. For example, lets say the first $15K is excluded, indexed to inflation, and the flat tax rate is 20% on all income, dividends, capital gains, etc. (Eh, plus or minus, but lets just go with it as a concept).

That would be fair. Whatever you make, Uncle Sam gets a cut. Nuff said. Fill out a postcard on April 15th, mail in your check, and enjoy the NBA playoffs.

Unfortunately, what the tax commission has come up with is more complications. And it'll tick folks off because they'll see it as a personal assault.

I have no doubt that there will be tax reform in 2006, because the Bush tax cuts are set to expire later in the decade which would result in a massive tax hike. So the GOP and Democrats will huddle up and come up with something that gives each side a little of what they want, and gives us taxpayers a more difficult time in April.