Monday, November 14, 2005
A Look At The Bush Tax Reform Plans, Part 1
Or, as this post could rightly be called, "Doing The Hard Work So You Don't Have To". Being an accountant blogger, I felt it was my civic duty to wade through all 221 pages of the President's Advisory Panel on Federal Tax Reform's two plans to simplify our federal income tax code. Nothing like some light reading but at least I can get paid to read it, as it does relate to my job. After I began working on this, I realized it would be too huge for one post, so I will divide it up into multiple parts.
I don't want to get too far into the technicalities of the report, so I will just address the features and benefits laid out in the Executive Summary. I looked at each proposed benefit and asked the following questions:
1. Does the feature or plans overall provide a benefit?
2. Does it simplify the existing process?
3. If the feature or plans do provide some benefit, what is it and who gets it?
Let's take a look at what these two plans, called the Simplified Income Tax Plan and the Growth and Investment Tax Plan, actually do for Joe Taxpayer. Both are very similar, differing mainly in how they handle corporate taxes. This first bunch are some of the features common to both plans outlined in the Executive Summary:
Simplification of the entire tax system and streamlined tax filing for both families and businesses.
The plans do provide a streamlining of the paperwork process certainly. Gone are the vast majority of the ancillary schedules, particularly Schedule A for Itemized Deductions. The plan boasts that the simplest tax returns could actually fit, front and back, on a postcard. I agree that this is definitely a benefit and both plans appear to meet this goal.
Lower tax rates on families and businesses, while retaining the progressive nature of our current tax system.
Unfortunately, while the plans do lower the tax rates on some taxpayers and businesses, it is definitely those at the top who benefit. The top marginal rate is lowered to 33% and 30% for individuals and 31.5% and 30% for large businesses. Given that proprietorships are now treated as individuals under the new plans, larger single business owners will pay a higher rate. The 10% bracket is also eliminated, meaning those at the bottom of the ladder will now be taxed at 15%. Those in the upper middle class will likely pay a bit more while those, like myself, firmly entrenched at or near the national median will likely pay a little less.
A couple of fewer tax brackets does simplify the process somewhat, but is really a minor improvement. The progressive structure is maintained to a degree, but definitely turns around as incomes increase beyond a certain level.
Whether or not the new tax rates are a benefit depends entirely upon the individual taxpayer. For the working poor, it's a bad deal. For the middle class, little change from before. For the wealthy, a great new system.
Extension of important tax benefits for home ownership and charitable giving to all taxpayers, not just the 35 percent who itemize; extension of tax-free health insurance to all taxpayers, not just those who receive insurance from their employers.
Both plans fail the simplification test on this one. The new credits have to be calculated and are based on regional averages indexed to various growth indicators. The math isn't terribly difficult, but it's hard to make the case that this is a simpler way to figure credits. Plus, those with high mortgage-to-equity ratios in big dollar real estate markets (New York, Boston, San Francisco, etc.) are going to see a sizeable chunk of their mortgage interest no longer helping them with their taxes. On the positive side, the limits on the annual health insurance premiums used to calculate that credit are not bad, though if one's employer doesn't contribute much that taxpayer may lose the benefit from what was once tax-free premiums.
The one clear benefit, though, is that it does extend tax benefits for charitable giving and mortgage interest to those who may not have received it before.
Removal of impediments to saving and investment.
First off, I challenge that any such impediment exists for the average consumer under the current system. Or rather, I challenge that such an impediment is born of any tax-related situation. However, both plans do offer substantial tax breaks for those inclined to save their money. The problem is that rewarding savings is, by nature, a regressive benefit. Those with the most can afford to save the most and thus gain a far greater benefit from the plans, though they do have annual limits similar to a 401(k). This part is a great benefit for those with the income to take advantage of it and for the securities investment industry, as all the plans default into indexed securities plans.
As for simplification, they definitely accomplish that. Gone are many of the savings and investment vehicles of today, as well as the onerous worksheets for medical expenses and dependent care.
Elimination of the Alternative Minimum Tax, which is projected to raise the taxes of more than 21 million taxpayers in 2006 and 52 million taxpayers by 2015.
Probably the best of this first list of details from the new plans. The AMT is a textbook example of a great idea ruined by poor design. Originally, the AMT was implemented to prevent wealthy taxpayers from taking so many deductions that they barely paid any taxes. However, the AMT was never indexed to any growth factor in the economy. This has resulted in more and more middle class taxpayers getting hammered each year with high tax bills compliments of the AMT. Both plans repeal the AMT outright, which is a benefit to many middle class tax payers and eliminates an entire book worth of forms and instructions. As for the wealthy, they already get such preferential treatment under the Bush Administration's fiscal policy that it would be very difficult to make the case that the AMT is much of a burden.
Good to end on a positive note. Currently, I give the overall plans a passing grade, though the repeal of the Alternative Minimum Tax definitely weights the average. I have to take issue with the clear supply-side bent of these tax policies, which are no surprise coming from the Bush Administration. I will get into that in more detail as this series of posts continues.
For now, though, that's a good enough beginning for a Monday!