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My Thoughts on “The Mother of All Tax Reforms”

Posted By Jim On 10/26/2007 @ 12:30 pm In Taxes | 20 Comments

Representative Charles Rangel (D-NY), Chairman of the House’s Ways and Means Committee, unveiled a huge $1 trillion tax cut bill [3]. It’s a bill designed to get everyone talking about it, rather than skirting the issues, though anyone thinking the House will pass it is likely misguided. I read CNN’s overview of it and wanted to share some of my thoughts with you all (and hope you do the same with all of us).

Decrease: Action! Action! AMT Repealed!

The bill would repeal the alternative minimum tax [4], rather than patch it for another year, and this is the marquee headline of the bill. I personally think a full repeal is foolish, why not adjust it and then index the dollar amounts with inflation? The idea was to stop the wealthy from taking unfair tax breaks, which is something I think should still happen, so why repeal it entirely when you can help the middle class while still keeping with the spirit of AMT?

Ultimately the goal of the bill seems to be to get discussion going on the AMT, so what better way than to just axe it? Most experts believe that another one-year patch will be put on the AMT to help the estimate 800 billion people likely to be affected by it (yes, 800 billion is a totally made up figure, but that number doesn’t actually matter unless you’re one of them!). It’s like putting a band-aid on an infected cut; it’s nice that you’re doing something, but let’s fix it instead of putting it off.

Decrease: Higher Standard Deduction

An increase in the standard deduction of $850 for joint filers and $425 for single filers, which, in theory, actually helps the affluent more than it helps the middle and lower classes. In theory, if you are in a higher tax bracket, you’re taxed at a higher rate. Thus, by increasing the standard deduction, you actually decrease the tax on a higher income earning person. Now, in practice this idea will help the lower income folks because they are more likely to take the standard deduction. As the standard deduction increases, the idea that buying a home is better [5], for the tax benefits [6], will become less and less clear.

Decrease: Easier Child Tax Credits

Without getting into the muck of this particular proposal, I think anything that allows more tax credits for families with children is a good thing. With the rising cost of college, two income families, and other children related items, I think we need to be fostering an environment in which children of all economic classes are able to flourish. Now, this puts the onus on the parents to actually spend that money on the children, which may or may not happen.

Increase: 4% Surcharge, $200k+ incomes

And the warm fuzzies end as we get into the part where the reform talks about paying for the first three tax decreases… The idea with this particular piece is that married with $200k+ in AGI and singles with $150k+ in AGI would have a 4% surcharge on the sum above that limit added onto their taxes. For those over half a million, it’s a 4.6% surcharge. This, in combination with a repeal of the AMT, would theoretically result in lower taxes for those making less than half a million.

Everything Else

That ends the provisions that most directly affects most of us, the rest include additional taxes on fund managers and businesses that will impact us indirectly. Anytime you tax businesses, it has the potential to stifle growth (duh! less money on investment) but I think that’s in part fueled by how people, businesses included, don’t like to be taxed more. However, if you look at the tax cuts, they’re really just closing loopholes like accounting magic (valuation of inventories would be affected), corporate tax break loopholes, and empower the IRS to penalize companies dabbling in chicanery. In fact, the bill actually proposes to reduce the top corporate tax rate from 35% to 30.5%.

Summary

Other than the AMT, this bill doesn’t really do much for me from the perspective of real change. So you tweak a few things here, tweak a few things there, why not just clean up the whole million page IRS code and make things easier on everyone? I think every time I see one of these “mother of all tax reform” announcements, I think about how simple life would be if we had a flat ax or consumption based tax.

What are you thoughts? Fire away!


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[3] $1 trillion tax cut bill: http://money.cnn.com/2007/10/25/pf/taxes/rangel_tax_reform/index.htm

[4] alternative minimum tax: http://www.bargaineering.com/articles/tax-relief-101-understanding-alternative-minimum-tax.html

[5] buying a home is better: http://www.bargaineering.com/articles/rent-forever-dont-buy-a-home.html

[6] tax benefits: http://www.bargaineering.com/articles/mortgage-interest-deductibility-not-that-great.html

Thank you for reading!