The Washington Post reported last week that Bush Administration officials are hard at work on a proposal which would bring substantial changes to the U.S. tax code. Unfortunately, the proposal floated in the Post article would actually raise taxes for many middle-class Oklahoma families.
White House advisors are crafting a proposal they say will stimulate investment and simplify the tax code. The centerpiece of the tentative Bush plan is to eliminate all taxation of interest, dividends and capital gains. In order to pay for these tax cuts, the administration is considering eliminating the deduction for state and local taxes.
When figuring their federal income taxes, many middle-class Oklahoma families claim a deduction each year for their state income taxes and local property taxes. This deduction would disappear...forcing these families to pay higher taxes.
The pieces of the Bush plan would dramatically reduce taxes for the wealthiest Americans...while raising taxes for many middle-class families. This is not a surprise. Any revenue-neutral plan that reduces the tax burden on the wealthiest families must raise the tax burden on middle-class families.
The Post article likely was a "trial balloon" floated by the Bush team to gauge reaction to their proposals. Thus, the final proposals are likely to be quite different than those mentioned in the Post article this week. However, if the Bush Administration is serious about proposing tax reform that will stimulate investment and simplify the tax code, I hope they consider these five suggestions:
1. Eliminate the corporate income tax. The corporate income tax is by far the most complicated part of the tax code. Eliminating the corporate income tax will go a long ways towards creating a more simple tax system. Also, with lower taxes corporations earn more profits...and payout more in dividends and wages. Which leads to suggestion #2...
2. Tax interest, dividends, and capital gains as ordinary income. Currently, dividends and capital gains are taxed at lower rates than ordinary income (like wages) because of concern over the double-taxation of corporate profits. Since the corporate income tax would be eliminated (see suggestion #1), there would be no concern about this double-taxation. Also, this ensures that those super-rich who live off of investment income still pay taxes.
3. Simplify tax-preferred savings accounts. Currently, there are too many tax-preferred savings plans (i.e. IRAs, Roth IRAs, 401k, 403b, 457, 529, Coverdell ESAs, SIMPLE, KEOUGH, etc.), each with their own unique rules. There is no reason for this complexity. I suggest combining them all into one plan that I call Individual Savings Accounts (ISAs). Each individual would be allowed to contribute up to $20,000 of income per year into these accounts. All contributions and earnings would be tax deferred until withdrawn. Withdrawals could be made at any time, and withdrawals to pay for education and healthcare expenses would be tax-free. The additional simplicity itself is appealing. However, by allowing tax-free withdrawals for education and health care expenses, this proposal makes it easier for middle-class families to become middle-class savers.
4. Reduce the number of tax brackets. Currently, there are six tax brackets. I propose we have three. For married couples, incomes between $0 and $50,000 would be taxed at the lowest rate. Incomes between $50,000 and $200,000 would be taxed at the middle rate. Finally, all incomes above $200,000 would be taxed at the highest rate. The tax brackets for single people would be one-half the size of the married rates in order to eliminate a marriage penalty ($0-$25,000, $25,000-$100,000, and above $100,000).
5. Make every penny spent on health care deductible. Under current law, only medical expenses that exceed 7.5% of income are deductible. For a family earning $50,000, they can only deduct medical expenses that exceed $3,750. Thus, many medical expenses like copays and coinsurance are not deductible. By making every penny of health care expenses deductible, middle-class families will be better able to afford the spiraling cost of health care.
Combined, these suggestions would work to increase business investment, stimulate job creation, reduce middle-class taxes, and promote economic growth...all while simplifying the tax code. In short, they do everything that an economic plan should.
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