We’re heartened that President Bush is determined to reform the nation’s complicated and maddening tax code. Since the election, he has continued to tout such reforms, such as at his Nov. 4 victory press conference.
We can only encourage such moves. We believe there are two actions he should pursue. The first is to make permanent the existing tax cuts, the second to reform the entire system.
On the first action, most of the tax cuts the president signed in 2001 and 2003 soon will expire. In 2009, the capital gains tax goes back to 20 percent from 15 percent. In 2011, the marriage tax relief, child tax credit and lower tax rates passed in 2003 all expire.
Also in 2011, the Death Tax Elimination Act of 2001 dies. Since 2001, the estate tax has been declining through a gradual reduction in the top rate in 2000 of 55 percent kicking in at $675,000 of income. This year, the top rate is 48 percent at $1.5 million.
Further cuts will drop the tax to zero in 2010. But then the next year, unless the tax cut is extended or made permanent, the original tax in place in 2000 would be reimposed (for estates of $1 million or more), which would be a real adverse jolt to the economy.
The second action would be comprehensive tax reform. We’re not keen on replacing the income tax system with a national sales tax, which is particularly harmful to the poor. And doing so, whatever promises the politicians make, would leave the door open to bringing back the income tax, leaving us with both taxes. It’s better not to impose new taxes but to cut existing ones.
A real flat tax would mean making sure “that no one gets deductions for anything, even for mortgages or state and local tax payments,” said Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University. “Otherwise you kill the whole purpose of a flat tax,” which is to make it simple.
For example, with a flat tax of 15 percent, one simply would multiply one’s income by 0.15 and send in the result. The idea, Adibi said, is the tax rate would lower everyone’s taxes paid to a rate less than they’re paying now with deductions and “in all likelihood would generate more revenue” because of the boost a simplified system would give to the economy. Imagine the time saved not filling out all those forms!
Studies show a rate of 15 percent or 17 percent would be revenue-neutral, something the president says he prefers.
But Adibi said the politics could be difficult. Homeowners might insist on their deduction no matter what. Then there are charities that benefit from deductions, the IRS bureaucracy, tax preparers and those envious of “the rich” who favor continuing the current system. At this point, it’s probably impossible to pass a flat — or flatter — tax without keeping at least the mortgage and charity deductions.
We’re in the early stages of discussion on such tax reform. We encourage our representatives to encourage debate and support such changes.