NCPA - National Center for Policy Analysis


March 7, 2005

The Bush Administration has cut taxes substantially, but the federal tax system remains inefficient and complex, writes Chris Edwards of the Cato Institute.

Edwards thus proposes a revenue-neutral "dual-rate income tax," whereby myriad deductions would end, but tax rates would fall for wages, interest, dividends and corporations:

  • Nearly all families would pay a tax at a low 15 percent rate on earnings; incomes above $90,000 (single) and $180,000 (married couple) would be subject to a 27 percent rate.
  • About 95 percent of all taxpayers would be in the 15 percent bracket; the effect would cut tax rates on middle-income families and create a consistent marginal rate of about 29 percent on wages.
  • The maximum individual rate on dividends, interest, and capital gains would be set at 15 percent; likewise, the corporate tax would be dropped to 15 percent and interest made non-deductible.

The changes would equalize and cut the combined top federal tax rates on dividends, interest, wages, and small business profits to less than 30 percent, compared to 35 to 45 percent under current law.

The dual-rate tax would retain the standard deduction (while increasing the personal exemption), retain the earned income tax credit, and keep deductions for 401(k)s, individual retirement accounts and Health Savings Accounts. All other deductions and credits would be ended.

Source: Chris Edwards, "A Proposal for a 'Dual-Rate Income Tax,'" Cato Institute, February 2005.

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