President Bush’s tax reform panel has unveiled a pair of proposals to make our national revenue system simpler, fairer and more favorable to strong economic growth.
How dare they!
You can already hear the outrage from K Street, where high-priced Washington lobbyists ply their trade. The current tax code does far more to help special interests than ordinary Americans, and they are ready to pounce. The trouble is that many ordinary Americans can also identify with one or more of these interest groups.
One case in point is the panel’s recommendation to reform the deduction for mortgage interest. That deduction surely does more for the real estate industry than homeowners, because such subsidies stimulate demand and lead to higher home prices. But once a family is locked into a big mortgage, they certainly don’t want to lose that deduction after the fact, either.
In response to that dilemma, the panel proposed protecting lower- and middle-income homeowners by converting the deduction to a credit equal to 15 percent of mortgage interest paid. Families in the 15 percent tax bracket would find that credit would be as valuable as the current deduction. But families in the highest bracket, 35 percent, would receive less than half as much from the credit. Additionally, the current $1 million limit on mortgages eligible for the tax break would shrink to the average regional price of housing, from $227,000 to $412,000.
The panel actually offered two tax reform plans, both of which rejected notions of moving to a national retail sales tax or its slightly more complicated equivalent, the value-added tax. It also crafted its changes to be “revenue neutral” and would convert revenue gained from such changes as the mortgage deduction into other benefits. One proposal would allow taxpayers who do not get health insurance through work to purchase a policy using untaxed money.
Under one of the plans, individuals would pay no tax on dividends paid by U.S. companies and could exclude 75 percent of their capital gains from taxation. Under the second plan, all investment income would be taxed at 15 percent. Both proposals would abolish the alternative minimum tax, a levy originally drafted to prevent wealthy individuals from escaping taxation but increasingly reaching into the middle class. They also would eliminate deductions and credits for state and local taxes and education, among others – replacing those with simpler tax breaks, including three tax-advantaged savings plans instead of more than a dozen provisions currently available for retirement, medical expenses and education.
The reforms have already been assailed by the usual suspects, including the National Association of Realtors and officials in high-tax states like California and New York. The tax lawyers and lobbyists will try to persuade President Bush to let these proposals wither on the vine. But the panel deserves his thanks for pointing to a fairer and simpler tax code, and we hope the president will give Congress a proposal that could free up some of the millions of hours now wasted complying with our tangled tax laws and convert them into productive activity.
