NCPA - National Center for Policy Analysis

TAX POLICY BY GIMMICK

February 2, 2005

Steve Moore (Cato Institute) proposed his own form of a voluntary, 20 percent tax in a Jan. 27 Wall Street Journal article. Under Moore's proposal, taxpayers would have a choice of paying income taxes under the current system, or under his flat-rate tax.

Although Moore calls it an alternative minimum tax, Bruce Bartlett, a senior fellow with the National Center for Policy Analysis, says that it would actually set up yet a third tax system. And Moore did not actually say what would be taxed, although he implies that it would be adjusted gross income (AGI).

Gross income, as Moore defined it in a 1997 version of his proposal, would have included not only such things as wages, but gifts and bequests and government benefits, which are nontaxable under current law. All capital gains and interest would be fully taxable, presumably including municipal bond interest, which has always been nontaxable. People would be taxed on contributions to Individual Retirement Accounts and 401(k) accounts, alimony payments and many other things that are now excluded from AGI.

Bartlett says the tax could more accurately be called a "max-tax" because most taxpayers would pay more under this proposal:

  • Looking at the Internal Revenue Service's published data for tax year 2002, it appears as if the only ones who would benefit are those making more than $200,000 per year; they are the only ones with an effective rate over 20 percent.
  • Even those with incomes between $100,000 and $200,000 would not benefit because they now pay an average rate of 16.6 percent.
  • Moore says that once people have chosen the new max-tax system, they could never go back; this means that they must be concerned not just with how the new system would affect them today, but forever.

There are many technical problems with the max-tax and it is simply not a serious idea, says Bartlett.

Source: Bruce Bartlett, "Tax Policy by Gimmick," National Center for Policy Analysis, February 2, 2005.

http://online.wsj.com/article/0,,SB110679309205937594-search,00.html

 

Browse more articles on Tax and Spending Issues