Dangerous Dan Thoughts and musings on the world

It looks like Bush may be paving the way for a flat tax. A presidential panel charged with recommending changes to the tax code have come up with two plans.

Under both of the panel’s alternatives, three out of four taxpayers would fall into the lowest, 15 percent, tax bracket.

Under one plan, individuals would pay no tax on dividends paid by U.S. companies and exclude 75 percent of their capital gains from taxation. Under the second plan, all investment income would be taxed at 15 percent.

Both proposals would abolish the alternative minimum tax, a levy originally drafted to prevent wealthy individuals from escaping taxation but increasingly reaching into the middle class. They also would eliminate federal deductions and credits for mortgage interest, state and local taxes and education, among others.

The advisory commission would replace those withdrawn tax breaks with simpler benefits, including three savings plans that supplant dozens currently available for retirement, medical expenses and education.

Hmmm… three-fourths of all Americans would fall into the 15% tax bracket. That sounds pretty similar to a flat tax in which four-fourths of all Americans would be taxed at 15% (exceptions made for low earners, of course). One of the touted benefits of a flat tax is that it’s a major simplification of the tax code. Not only does it make it easier for people to figure their taxes, but it also closes gaping loopholes. The thing about those loopholes is that the folks who really exploit them are usually rich. They can afford smart accountants who will tuck money away in all sorts of different investments and tax shelters. Without such loopholes, though, the rich would be forced to pay up.

I think here of somebody like Teresa Heinz (no-longer using the Kerry) who is worth over a billion dollars but for the 2003 tax year paid only 63 cents and a couple of Cheetos she found in her couch. To be more accurate, she’s worth over a billion and reported only about $5 million in income (which is itself unbelievably small compared to her worth; she either had a bad year or her accountants have shrouded this as well), sheltered $2.78 million and paid only $628,401 in taxes. That means she paid just 12.4% of her already oddly low income in federal income taxes. A proper flat tax would help prevent this sort of creative accounting from taking place.

While a real flat tax now would be nice instead of the graduated idea presented, it makes political sense to go with the graduated set-up. A real flat tax now is dead on arrival; it would never make it past the political and media maelstrom because it’s simply too drastic an overhaul of the current very graduated, unnecessarily complex system. It wouldn’t take much for opponents to scare the pants off the public by making them think such a big change in taxation would work against them. Unless there’s an outside event forcing it, e.g. 9/11, the public doesn’t handle sudden massive change well; predictable stability is preferable to unknowns. So these plans are halfway proposals. Simplify the code a little bit, put most people under the 15% tax rate and once they get used to it and see the earth has not been split asunder, they’ll be more amenable to a real flat tax later on. In other words, this is just the flat tax getting its political foot in the door.

Don’t hold your breath on seeing any actual reform, though. The Democrats will fight Bush on proposed changes merely because it’s Bush proposing them. They’ll roll out the usual talking points about how the reforms are tax cuts for the rich, hurting the poor and middle class, bringing about the apocalypse, etc., and they’ll haul out all sorts of numbers that have been spun so much they might as well be random strings of digits.

I hope Bush goes for it. Politics sure have been exciting lately and this could be a show. Hopefully he won’t get caught flat-footed this time, as he was with Social Security reform which the Dems have pretty much quashed.

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