Editorial Roundup for Sunday — November 06, 2005

• Tax reform: Bold, bulky and Dead on Arrival


Tax reform: Bold, bulky and Dead on Arrival

St. Louis Post-Dispatch, Friday, Nov.

The President’s Advisory Panel on tax reform this week unveiled its plan for overhauling the federal income tax. Treasury Secretary John Snow called it “bold,” but didn’t endorse it.

The bold and bulky document will now be wheeled into the Museum of Forgotten Plans where it will gather dust forever. A rain forest will sprout in Death Valley before Congress cuts such sacred cows as the deduction for mortgage interest and for state income taxes, as the panel proposes.

Everybody wants their taxes made simple, and the panel’s recommendations would shrink the hated Form 1040 by half. But Americans also want their favorite breaks – for everything from child care to hybrid cars – and such complexity defeats simplicity.

Still, as the conservative-leaning tax panel is chauffeured off into the sunset, we might muse for a moment about what a really fair income tax might look like.

First, we ought to revive the progressive nature of the tax code, which has been getting flatter over the years. We should bring back the 36 percent and 39 percent rates for those earning over $200,000.

Taxes hurt. That’s why we should put our deepest tax bite on people whom it will hurt the least – those with lots of money. Tax breaks should be targeted mainly at working families who are scraping by. For married couples with two children, median family income stands at about $65,000 a year. Tax cuts should be aimed at families on the lean side of that number.

We should also treat most kinds of income the same, rather than giving special tax breaks for investors. As the tax code stands now, wealthy folks can clip coupons beside the pool in their million-dollar manse while being taxed at just 15 percent on their dividends and capital gains from stocks. Meanwhile, the pool man may pay a 25 percent marginal federal income tax rate, plus another 7 percent payroll tax on his wages. Like the inability to chose one’s parents, that’s not fair.

The overwhelming majority of capital gains and dividends are reaped by the wealthy. The theory is that taxing such income discourages investment, but the dampening effect of taxes on the supply of investment capital is exaggerated. Taxes on investment income were higher in the 1990s, which saw the greatest investment boom of the 20th century. Besides, low taxes on dividends encourage companies to hike dividends. Wouldn’t the economy be better off if companies reinvested their profits in productive enterprise rather than writing bigger checks to shareholders?

We could raise taxes on profits from passive investing in stocks and bonds, while giving breaks to start-up entrepreneurs and their financial backers. That would encourage innovative risk-takers without tossing tax bonbons to easy-chair investors.

While we’re at it, we should revive the estate tax, which is fading fast. Before tax-cut fever took hold in 2001, the estate tax fell only on the heirs of the richest 2 percent of Americans. Should we tax the windfalls of the lucky-birth club less than we tax the wages of people who work hard for their money? Estate tax law, by the way, already contains special breaks for family farms and small businesses.

If we did all this, we could reduce our alarming $400 billion federal deficit, which is debt we will pass on to our children. We could also return the alternative minimum tax to what it used to be – a tax on wealthy people with tax shelters – rather than a hit on the upper middle class. Then we just might be able to trim taxes a bit for the hard-working middle-class wage earners who keep this country running.

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