NCPA - National Center for Policy Analysis


November 4, 2005

President Bush's tax reform panel proposed a plan that would usefully eliminate a multitude of tax subsidies. The commission's preferred plan shifts the tax base away from income and savings and toward consumption. This would strip away the multiple tiers of taxation currently imposed on capital investment, and give a big boost to economic growth, says the Wall Street Journal.

Chairman Connie Mack says the reform proposals would create a "slimmer and simpler tax code," and thus reduce the $135 billion a year of deadweight compliance costs (about $1,000 per taxpayer). Consider:

  • The Mack plan eliminates the alternative minimum tax (AMT), a stealth tax that hits Americans with lots of deductions; to pay for AMT relief, the plan limits the housing deduction to $315,000 and the employer health care deduction to $11,000 per worker.
  • The plan eliminates the deduction for state and local taxes; this deduction has always unfairly subsidized liberal and often richer states at the expense of states that have lower tax rates, or no income tax at all.
  • The plan cuts capital gains and dividend taxes and allows Americans to tuck away at least $20,000 a year in Roth IRA accounts, which nearly quadruples the amount of annual tax free savings for middle-income families.
  • The plan would allow business to expense all capital purchases rather than comply with complicated and costly depreciation schedules that can stretch out tax payments over 30 years.

While many observers are pleased with the proposed changes, some are also disappointed that the Mack plan leaves tax rates close to where they are now and thus falls well short of where Congress and President Reagan got us in 1986 with two rates of 15 percent and 28 percent. The Mack plan has four rates, and it keeps the highest and most economically damaging rate at 35 percent.

Source: Editorial, "Big Mack Tax Reform," Wall Street Journal, November 2, 2005.

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