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Wyden-Gregg Tax Plan: The Bipartisan Tax Fairness and Simplification Act of 2010
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This year will mark the final year of many of President George W. Bush’s tax cuts from 2001 and 2003. Many deductions and tax cuts are set to expire this year and there’s a lot of talk about what Congress and President Obama will do. One plan that was thrown out about a month ago is the Wyden-Gregg Tax Plan, titled S. 3018 The Bipartisan Tax Fairness and Simplification Act of 2010.
It’s sponsored by Ron Wyden, Democrat Senator from Oregon, and Judd Gregg, Republican Senator from New Hampshire, and it was introduced in late February. You can read the text of the draft bill here but here were the big takeaways I read. According to OpenCongress, the bill is currently in the Committee on Finance.
Reducing the Number of Tax Brackets
Today, there are six federal income tax brackets. The bill would trim them down to three – 15%, 25%, and 35%. Married filing jointly filers whose taxable income is under $75,000 would see a 15% tax rate, amounts between $75,000 and $140,000 would be taxed at 25%, and amounts over $140,000 would be taxed at 35%. For single filers, those earning under $37,500 are taxed 15%, amounts over $70,000 are taxed 25%, and the balance over $70,000 is taxed at 35%. It appears that the marriage penalty is removed from the tax brackets.
It also eliminates the Alternative Minimum Tax, something Congress keeps pushing off with one year fixes.
Increased Standard Deduction
Today, the standard deduction is $5,700 for single filers, $11,400 for married filing jointly. The bill would increase the standard deduction for single filers to $15,000 and double that for married filing jointly. This would significantly simplify returns for a lot of filers as the standard deduction will probably be higher for most people. It’ll also save them time in tax preparation since taking the standard deduction often means a more simple return.
Retirement Savings Accounts
Take all of the IRAs, put them in a box, shake, and out pops a Retirement Savings Account. Add to that a Lifetime Savings Account and you have something that is likely to change the face of retirement saving in the years to come, much like Roth IRAs did a dozen years ago. At the core of it is the ability for families to save $14,000 a year for retirement in addition to any 401(k) programs they have access to. A lot of the bill involves working previous laws on IRAs and Roth IRAs so they comply, so we’ll hold off judgment on this nugget until things progress more.
Capital Gains Changes
Here’s where things get a little tricky… for your capital gains, there are a few changes that favor investment. 35% of your gains in assets held for more than 6 months but not more than 1 year and doesn’t exceed $500,000 plus 35% of any long term capital gain are not taxed (not included in gross income). What this ultimately means is that 35% of your long term gains are tax free, which for this purpose is extended to assets you held for more than 6 months, up to a certain amount ($500,000). This exclusion is also extended to qualified dividends.
There are many other changes in the bill, such as the Earned Income Credit, the Dependent Care Credit, and the Child Tax Credit to be made permanent, many involving businesses and small businesses. Here were are a few other sources you can review to get their take on it:
- Heritage Foundation
- Two Page summary from Wyden – hits all the high level points.
- Daily Kos – Not a site I read often but has a good recap too.
- WSJ – You might have to do the free WSJ trick to read the article.
I’d really like to see something happen in terms of simplification and reform, I’m curious to see an analysis of the financial impact of change the tax laws this way and would need to see one before feeling strongly for or against it.
Any initial thoughts?
(Photo: kylerush)
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My take is this has zero chance of passing this year. There are lots of tax plan overhauls submitted every year and very few get through. This is a major change in an election year.
Simplifying returns and creating a better tax code are two different things in my opinion. But there is the problem, who defines what a better tax code is and what a “fair” tax liability is?
Let the fair/flat tax talk begin !
saladdin
I agree with you and unfortunately big changes are hard to pass, but I’m hopeful it’s a good sign for what lies ahead.
My suggestion is baby steps. A large change will not happen. It has to go in steps. That’s what I think is stopping all of this. Focus on one thing, say AMT, and hammer it then move on to that Pet Credit (kidding).
saladdin
I agree. It’s so tough for major changes to get through and it would be great to just see the small changes get through. We’ll see if that happens though.
I agree – any proposals that simplify tax preparation should get a hearing. It is also important that savings in the U.S. increase. The bill seems to do this. I’m also interested in predictions on what it would mean for the overall Federal deficit.
I’ve read 5 seperate blogs/articles about this and the only thing I have found is that one study from the Heritage people say this will create 2 million jobs. How/Why I don’t know but I’ve seen nothing from the GAO about the revenue generated.
saladdin
I don’t like the “not taxing a portion of capital gains”. I think that makes it too confusing and it doesn’t provide much benefit to most people. We do want investment in companies, but I’m not sure this would necessarily increase investment.
I’d be interested to see if anything would come of a review of “corporate welfare” (from the two page summary from Wyden’s page). Seems more like talk than action.
Capital gains as an issue is odd to me. I once read, and if someone can find newer, accurate data please do so, but something like only 7% of people actually file returns with capital gains.
I am going from memory and can’t remember the cite but maybe someone smarter then me can find newer data.
Also, those of us worried about capital gains tax are not “investing” in companies. We are trying to invest for retirement. Very few people invest in companies because they like the company. We want a nice return and rarely care what the business is doing to get it.
saladdin
Ok, found this but there is no cite for the numbers used. And the posting is politically motivated so read it with caution.
saladdin
Next, we added up the number of taxpayers who reported income in those two categories, so we could find out how many taxpayers were subject to capital gains taxes in 2005.
Among tax filers making $200,000 or less, about 14.3-million of 130.8-million filers reported income subject to capital gains taxes. That’s about 11 percent.
Among tax filers making more than $200,000, about 1.8-million of 3.6-million filers reported income subject to capital gains taxes. That’s about 51 percent.
So only 11 percent of what we’re calling middle-class people report capital gains, while 51 percent of wealthier people report it.
http://www.politifact.com/truth-o-meter/statements/2008/jun/11/republican-national-committee-republican/mostly-higher-incomes-pay-capital-gains-tax-/
That doesn’t surprise me that the middle class would be barely impacted. And actually, I find politifact pretty good at stating the facts and not bringing a political bias or twist to their analysis.
Here is an opposite take on this.
The US is in debt and it is getting worse. At the end of the day they will raise tases and do nothing else as suggested here. This is the reality of the situation.
Bill Snider
This is a tax increase for probably 50% of filers. It is an attempt to make everyone pay something. It will make that 50% or so people who now pay little or no income tax pay some/more. And it will decrease the tax for higher earners.
What I don’t see is that actually increasing revenue.
saladdin
With a standard deduction of $30k for married filing jointly, there will possibly be a decent amount of individuals paying nothing or next to nothing in taxes.
A quick rebuttal to that. Raising taxes does not always result in greater tax revenue. We aren’t there right now, but a larger tax burden will eventually become exactly that, a burden on the economy and production. The very things that generate tax revenue.
According to what I read, the new system should bring in as much revenue as the current system. That being said, I’m for a simpler tax code and I think there is room for a lot of improvement in our current tax code.
Where did you read that? I haven’t found anything concerning revenue numbers from the GAO.
Thanks,
saladdin
When you have a ton of speical interest groups, there will NEVER be anything as a simple tax rate and system.
Bill Snider
In the short post, I feel that it seems to be a great plan. However, I will want to read more about how I could be effected.
The simplier the better in my opinion.
Without knowing the full plan and only the details presented here, I like this plan. The only thing I would like to see is a 0% rate on capital gains and dividends for those making under $200k.
Fat chance on that. The best you can hope for is that we keep what we have right now. Those in the 10% – 15% tax bracket getting 0% rate for long term capital gains.
Congress wants more tax money. Since the lower income earners usually don’t invest, Congress is able to give them a 0% rate.
I agree that simplification is needed. This bill looks overly ambitious concerning our Congress but I hope it at least emphasizes the issue out there that tax reform is needed.
What happens to the balance of your capital gains? Still taxed at a favorable rate, or taxed equivalent to ordinary income?
It would be taxed as regular income.
From the Heritage article:
“Wyden-Gregg exempts 35 percent of long-term capital gains and dividends from any taxation and then applies the taxpayers’ top marginal income tax rate to the remaining 65 percent of the gain.”
an RSA sounds like it would be amazing…color me skeptical though that it will ever happen
Interesting proposal. Sounds good to me for the most part.
This is basically a repeal of the regular tax and an enactment of AMT with a couple different brackets. But the meat of this bill is in the corporate side. A rate reduction, but the end of the deferral on foreign earned profits. That is where the big fight would be, and thus, NOT GOING TO HAPPEN.
The problem I see is that we get tax code changes too often. The 2001/2003 tax bills should have lasted no less than twenty years. In another ten years we should examine the results.
Basically there is so much distortion caused by too frequent tax policy changes that no one can really determine if they are successful or not.
Personally I have saved more in my 401k and IRA and invested in dividend stocks and growth stocks because of the 2001/2003 tax cuts.
I do like a plan of rewarding investors who hold stocks longer than five years.
I think the results of the Bush tax cuts are pretty clear … lowered taxes for people who do a lot of investing. It wasn’t in response to a problem and the reaction was happiness, for folks who get a lot of long term capital gains.