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10/20/2005 Entry:
Watch Out for Tax Simplification
Bush's tax simplification committee is issuing a report on November 1, 2005. But we already hear about the committee's main recommendations. We can breathe a sigh of relief that there will not be a national sales tax. The simplification consists of reducing 52 schedules down to 10. That's nice for the super-rich who play around with loopholes. But overall, at least to me, their plans - there are 2 - appear to favor those who invest over those who work for their money. The average guy will pay through the nose.
Three recommendations seem to get the more prosperous to pay more:
- Elimination of the deduction for state and local taxes - This affects people with higher income more than those of lesser income. New Yorkers, with their high income taxes are complaining bitterly about this
- Capping the deduction for mortgage interest - This will be replaced with a 15% tax credit. The cap is set at a little over $300,000. Californians are complaining bitterly about this.
- Highest tax rate raised to 35% - Six brackets will be reduced to 4, stretching from 15% at the low end to 35% at the high end.
I am for all 3 of these actions. Why, in effect, should a resident of Arkansas pay taxes to support a resident of New York? As far as the mortgage deduction is concerned, the cap should be about $500,000. Anything higher does not encourage home ownership; it encourages taking advantage of the government. A high end of 35% increases progressivity, and conteracts somewhat the steep regressivity of the payroll tax.
Three other recommendations seem to favor the more prosperous:
- Repealing the Alternate Minimum Tax - Though it was designed to catch rich people who pay no tax, evidently not-so-rich people are getting caught
- Replacing most exemptions and deductions with tax credits - This may catch some extra income, but I don't kow
- Reducing taxes on investment - The committee recommends 2 different plans. In one, the tax on dividends will be zero, on capital gains 8.25% and on interest the ordinary amount. In the other the rate will be 15% on dividends, capital gains and interest
I guess getting rid of AMT is OK. But I do not think we should replace exemptions and deductions with tax credits. We should get rid of them - at least most of them. Here is where the complexity of the tax code comes in. And the complexity is there to encourage loopholes and tax-avoidance schemes that the rich use to lower their taxes to a pittance.
What galls me most is the idea that investment should not be taxed or be taxed at a lower rate than income earned through employment. In the first approach the tax on dividends is zero. Under this system, it's possible for the heir of a billionaire to live like a king, do no work and pay ZERO income taxes, while a worker employed on 2 jobs to make ends meet, pays a 15% tax. You call this fair?!?
Republicans are trying to get rid of taxes on investment. This is wrong. It favors the rich. It punishes the non-rich. Besides, how are we going to build up America's competitiveness, if we discourage workers this way?
Watch out for tax simplification. Republicans are using it as a path for helping the rich investor at the expense of the non-rich worker.
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