{"id":367543,"date":"2010-02-26T10:20:13","date_gmt":"2010-02-26T15:20:13","guid":{"rendered":"http:\/\/www.theatlantic.com\/business\/archive\/2010\/02\/what-real-tax-reform-looks-like\/36680\/"},"modified":"2010-02-26T10:20:13","modified_gmt":"2010-02-26T15:20:13","slug":"what-real-tax-reform-looks-like","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/367543","title":{"rendered":"What Real Tax Reform Looks Like"},"content":{"rendered":"

\"110There is nothing simple about tax reform. Our current system is a smorgasbord of rate brackets and credits and deductions designed to promote growth, but also benefit special interests and preserve favored incentives. The new tax reform plan from two senators — Democrat Ron Wyden and Republican Judd Gregg — aims to strip the clutter. It could make filing taxes as simple as reviewing a one-pager from the IRS. It would reduce the number of tax brackets from six to three (at 15 percent, 25 percent and 35 percent); eliminate the dreaded Alternative Minimum Tax; triple the standard deduction while killing dozens of exemptions; and significantly reform corporate taxes.<\/p>\n

But is it a good idea? I spoke with Roberton Williams, a senior fellow at the Tax Policy Center. Yesterday I published the first part of our chat, about how the dramatically simplified tax system could make filing taxes so easy it could threaten the existence of tax preparers like H&R Block<\/a>. Today we continue the conversation about the nuts and bolts of a bold new vision for our tax structure:<\/p>\n

What’s the single most significant change you see in this plan?<\/b><\/p>\n

The biggest change is on the individual side, the general
\nsimplification that makes the income tax more understandable. If you go
\nback to 1986 the last time we did a major tax reform, we had 15 tax
\nrates and we went down to 3. It brought the rates down a lot, and got
\nrid of a lot of exemptions for special interests. Lower rates, fewer
\nrates, broader base. <\/p>\n

Over the intervening decades, Congress has added in a lot of special
\nprovisions to complicate the tax code: the child tax credit, credit for
\ngoing to school, for saving for retirement. This is mostly because
\nCongress is doing social programs through the tax program rather than
\nthrough the spending side. The Tea Party would be all over you for a
\nnew spending program, but it would love you if you announce a new tax
\ncut. So take the child tax credit. The government sends you a thousand
\ndollars for each kid you’ve got. We’ve run it through the tax system so
\nit looks like a tax cut instead of welfare. But it’s the exact same
\nthing. To be clear, these are good things to do sometimes! But it’s
\nmade the tax system complicated and people don’t understand what’s
\ngoing on.<\/p>\n

We know this reform would make our taxes simpler<\/a>. But how would it actually change what we pay?<\/b><\/p>\n

One big way it could reduce your tax burden is with a large increase in the standard deduction:
\nit will be $15,000 for individuals, whereas now it’s around $5000 for singles. That does two things. It reduces taxable
\nincome, so it cuts down your tax bill. And it pushes people away from itemized deductions.<\/p>\n

My
\nguess is that it would cut taxes at the bottom. They would maintain all
\nthe tax credits, child, earned income tax credit, child dependent care.
\nPeople at the top: their top rate stays at 35 percent rather than
\nrising as it would under Obama’s plan. But the bottom 10 percent
\nbracket is eliminated, so they still have the bottom of their income
\ntaxed at 15 percent. It does look like people
\nat the bottom are better off, but people in the top might be slightly<\/i> worse
\noff.<\/p>\n

So this cuts down on itemized deductions. How does that make the system simpler?<\/b><\/p>\n

It removes complicated deductions. For example, one really big one they
\nhave is getting rid of the deduction for state and local taxes.<\/p>\n

How does that deduction work?<\/b><\/p>\n

Currently, if I pay $1,000 in state taxes and I’m in the 15 percent
\nfederal tax bracket, I can deduct the $1,000 and save $150 of income
\ntax. Effectively I pay the state $850 and the federal government kicks
\nin $150 through my tax savings. We could have the same outcome if my
\nstate tax were only $850, I wasn’t allowed to deduct that on my federal
\ntax return, and the federal government sent the state $150. That’s what
\nthey’re trying to make happen.<\/p>\n

The underlying assumption is that I’m willing to pay $850 for state
\nservices but not $1,000. Without the federal tax savings, I’d be an
\nunhappy taxpayer. But with the deduction, the state can get more
\nrevenue–$1,000–and I’m happy paying only $850 (net of tax savings).
\nThe tax deduction is an indirect form of revenue sharing from the feds
\nto the states. The proposal would remove the deduction from the income
\ntax and make the revenue sharing direct.<\/p>\n

What kind of deductions and exemptions does the plan keep?<\/b><\/p>\n

They’re keeping the mortgage interest deduction and the charitable gift
\ndeduction. This is understandable, given the complaints the
\nadministration got last year when it tried to cap charitable
\ndeductions. The two big groups that complained then were the charitable
\ngroups and the real estate industry. They said don’t do this, and
\nCongress received the idea with cacophonous boos. [Editor: Full list of
\ndeductions in the Wyden-Gregg plan here<\/a>.]<\/p>\n

Does the bill move the tax burden to the consumption side?<\/b><\/p>\n

There is nothing that I see in the bill to do that. There might be
\nsomething that I’m not seeing. It does make sense to move to a VAT.
\nWe’re the only industrialized country in the world that doesn’t have a
\nVAT. You look at our fiscal situation, and there’s no easy way to cut
\nspending. So we need revenue. A VAT can be low-rate so it doesn’t
\neffect behavior much, and broad-based so it collects a lot of money.
\nThe complaint is regressivity. The poor spend every cent they’ve got.
\nBut you can make up for that with a tax credit at the bottom end.<\/p>\n

Will this plan be revenue neutral? Will it raise or lose money for the government?<\/b><\/p>\n

We haven’t done a revenue estimate. The Congressional Research Service
\ndid something for them — but it’s loaded with caveats. It basically
\nsays as a package this would make money relative to current tax law. It
\nwould not make as much as the president’s proposal, which raises taxes
\non the wealthy next year.<\/p>\n

From the looks of things, the plan mostly cuts taxes for individuals. So where’s the money coming from?<\/b><\/p>\n

They’re closing loopholes on the corporate tax side: things like not
\nallowing firms to hold income overseas without paying taxes on it and
\nthen bring it back home, which is called repatriation. This proposes to
\ntax that money immediately.That that would bring in more revenue. By
\nbringing more money home you’d have more investment here and less
\noverseas. Now it makes sense for say Exxon to invest in projects in the
\nMiddle East that have a lower rate of return than here in the US
\nbecause they’re deferring their tax liability. Bring those dollars home
\nand invest in higher return enterprises at home.<\/p>\n

Second, it taxes a lot of income not now taxed. There are two big ones
\nhere. It ends the exclusion for Social Security benefits. It would also
\ninclude taxes on municipal bonds. This is a big source of wealth for
\nrich people. <\/p>\n

One thing the tax plan does is it cuts the value of inflation from a
\ncorporation’s interest deduction. That’s sound complicated! Walk me
\nthrough that.<\/b><\/p>\n

There are two ways to finance investment. You can sell stock or borrow
\nmoney. To sell stock you have a return. These are non-deductible
\ndividends. But right now firms can deduct the interest they pay on
\nmoney they borrowed. It’s cheaper to borrow money than to sell equity,
\nso corporations do too much borrowing. This law is trying to balance
\nthe incentives here and attract direct investment.<\/p>\n

(Flickr\/Mat Honan<\/b><\/a>)<\/b>

\n

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\n\"\"<\/p>\n","protected":false},"excerpt":{"rendered":"

There is nothing simple about tax reform. Our current system is a smorgasbord of rate brackets and credits and deductions designed to promote growth, but also benefit special interests and preserve favored incentives. The new tax reform plan from two senators — Democrat Ron Wyden and Republican Judd Gregg — aims to strip the clutter. […]<\/p>\n","protected":false},"author":1534,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-367543","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/367543","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/1534"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=367543"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/367543\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=367543"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=367543"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=367543"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}