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Day By Day© by Chris Muir.


Friday, November 04, 2005

Tax Simplification?

The WaPo has an article today about the Tax Reform Bill that hasn't gotten much attention because of the crybaby politics going on in Washington lately. Unfortunately, it doesn't look like there's much in the bill to benefit the average joe. Basically it amounts to this:

Among the panel's recommendations, released this week, are reduction of tax brackets from six to four, elimination of the marriage tax penalty, and a general restructuring of personal savings mechanisms such as IRAs and health savings accounts.
Which sounds great. However, the bill reportedly doesn't go far enough, and apparently what we have here is similar to the 1986 tax reform bill. Then the code was simplified to eliminate several tax exemptions, reduce the amount of tax brackets, and then lower taxes. Yet when Congress passes a piece of legislation one year, there is nothing to keep them from changing it the next. So what we ended up with over the years (especially in the 90's) was increases in the tax rates without the previous exemptions. Effectively this meant that the taxpayers had a bigger burden than they did in 1985, prompting the legislature to write more into the tax code again.

Also consider that with the elimination of certain tax exemptions, this reform bill would amount to a tax increase for some. Take for example this assessment from an economist/blogger:

I calculated my liability under the Simplified Income Tax, the leadoff alternative from the Panel's recommendations, from our 2004 income tax data. The reduction of the mortgage interest deduction would phase in (in a manner that wouldn't sock most people until George W. Bush was cutting brush in Crawford for his day job); I assumed full implementation of the reduced credit. The bottom line is that we'd owe 17.6% more under the Panel's alternatve than we did under the 2004 law, which is a lowish four-figure amount. This is the net effect of three factors: "broadening" the tax base by double-taxing the money paid to the state, city, county and school district, as well as by reducing the effective mortgage interest credit, narrowing the base by increasing the effective personal and dependent exemption credits, and finally reducing the effective tax rates a bit.

If I were to work this out for 2005, we'd probably fare worse, since we'll have a full year's worth of the larger mortgage on the current ranch. I'd figure our friends in Bethesda with the enormous interest-only mortgage would be well and truly screwed
It seems to me that this reform bill doesn't go far enough, and is simply a matter of, as the WaPo article states, "a few deck chairs moved on the Titanic".