Friday, November 04, 2005

A Progressive Tax Plan

I've had a chance to sit down and read the President's proposed tax reform initiative.

Told you this place gets a little wonky.

Curiously, United for a Fair Economy has as well.

It's been called a "non-starter", primarily because of its reduction in the mortgage interest credit (from the interest on a million dollar mortgage to a $420,000 mortgage). Sure sounds like a non-starter, but....

Well, UFE has done the numbers crunching better than I have, and it has proposed some alterations to the plan that would make it more palatable (while retaining the bones) AND made further proposals not in the plan for goals that should be achieved in any tax reform. I'll post them here, and then opine:
UFE supports the Panel’s proposal to convert the home mortgage deduction to a tax credit that benefits all homeowning families equally. UFE also supports capping the size of the mortgage upon which the credit is based. Maintaining home mortgage interest deductions in any form continues to leave non-homeowners (30% of the population) off of the asset-building train. The Commission should consider a rental housing tax credit equal to 15% of the annualized value of median rent that could be set aside in a special Savings for Home Ownership account that could be used for down payments.
Let's get right to it, shall we? I would argue with UFE that a $412,000 mortgage in major population centers buys you nothing you would want to live and raise a family in. (Let's assume that $412,000 is 80% of the value of the home, e.g. the owner put 20% down. That makes it a $500,000 house.) In many areas, that's a starter home.

OK, so now we might be able to work a bit with this. I propose that current mortgages be exempt from this proposal, and only new mortgages be included. Now we have a mechanism, an ownership mechanism. A kid out of college gets an apartment, let's say $1,000 a month (or shares in one, we can't forget that option), and puts away $150 a month towards his down payment. That's $1,800 a year (before interest), targeted towards his home purchase, which means he has, in effect, saved $9,000 towards his half-million dollar home. Inside of ten years, he will have saved enough for a down payment on a house, not insignificant, since most college kids now delay marriage and family until they are in their twenties and thirties.

Further, as with all government programs, there ought to be a way to make adjustments for regional variances in housing prices. Likely, this would take the form of a mandate for states to make up the differences in tax credits, which would also stabilize populations in more costly states. Fair, equitable, and no one currently owning a house gets hurt.
While individual and corporate alternative minimum tax laws may be flawed in their construction, they are correct in their aim. It’s wrong for so many high-income taxpayers to pay only minimal tax payments and for a growing number of large corporations to avoid tax payments all together. We should repeal existing alternative minimum tax laws and replace them with effective laws that ensure those at the top pay their fair share.
(Personal admission here: I make enough that the alternative minimum tax has been my bottom line tax liability for a few decades now, so I have no personal stake in any reform here)The alternative minimum tax (AMT) has traditionally been meant as a way to ensure that the wealthy pay their fair share of taxes. When it was first implemented, the AMT was designed to affect taxpayers with incomes over $200,000. In 1966 (which would be somewhere north of a million dollars by today's standards).

However, current projections show the number of AMT taxpayers skyrocketing from one million in 1999 to almost 31 million in 2010. Without reform, virtually all upper-middle-class families with two or more children will be paying the AMT by decade's end. "Upper middle class" in this case is defined as a family of four making over $59,000 in wages and investments. Naturally, if it's wages, your payroll withholdings will cover you. Or not. Depends on how high your state taxes are, and other credits you may think you are entitled to.

It's time to reform this turkey.
The (President's) Panel’s recommendations wrongly continue and extend the favorable treatment of investment income. UFE believes the “work penalty” enshrined by tax policies that favor unearned investment income over wage income runs counter to the American Dream of encouraging and rewarding hard work. UFE favors taxing income from investments the same as ordinary income.

The fallacious argument that dividends are somehow "doubly taxed" is valid, but misconstrued. Corporations pay dividends out of after-tax income. Absolutely.

But you and I pay sales taxes out of after-tax income, and technically, we pay our state and local tax withholdings with after-tax income, not to mention other taxes such as property tax.

I'm going to go the panel one better here: I would eliminate all taxes on savings accounts held at FDIC insured banks. You want an ownership society? Then let the poor and working classes have the opportunity to save up the money to invest.
Incentives for government-sponsored wealth creation should at the very least benefit all taxpayers equally, rather than the proposed three times higher benefit given to the highest income taxpayers. Ideally, wealth creation programs would be progressive in nature, rewarding savings by low-income/wealth taxpayers with a more generous amount of tax-based subsidies.
I probably ought to explain this point a bit more.

Let's say I put a dollar into a 401(k) at work, and the cleaning lady does, as well. She's taxed at 15%, and I at the new 33% top tax rate (it may go as low as 30%). These dollars come out of pre-tax income, meaning that Uncle Sam is contributing to our 401(k)s by deferring his share of that dollar.

Look at those numbers: she gets Uncle Sam to kick in 15 cents. I get Uncle Sam to dig twice as deeply into his pocket! And this isn't even looking at the Social Security payroll taxes (which is where UFE can say "three times higher benefit").

That's simply not fair, because who's going to have better access to wealth creation in his (hint) lifetime, and thus be in a better position to afford to retire?
Home mortgage tax credits, new rental housing tax credits and deductions related to government savings programs should all be made refundable, so that if taxpayers with low or no tax liability receive these deductions and credits, they can get their savings back in cash.

Amen. Can't say anything more about this. It's nonsensical for someone who earns a refund not to get full advantage of his disadvantageous position (i.e. making too little money for his calculated liabilities), plus the government has held his money for the better part of a year, interest free.

Read more about this at the link above.

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