Thursday, November 8, 2012

Tax Reform is Easy: Try This Plan

Everyone (on both sides of the aisle) loves to talk about how we need tax reform to both broaden the base and increase locked up growth potential and yet we can never seem to even get reform started.  So, I thought, why not lay out a real simple tax reform plan that both sides should be able to get their arms around just as an example of how easy this really should be (of course, I live in a world without lobbyists or wealthy patrons to please).

First, Speaker of the House John Boehner yesterday offered up his cooperation with the line that if Reagan and Tip O'Neill could do tax reform, so could he.  I think this provides us with our starting point to get the President on board, as a key feature of the Reagan/O'Neill Reform was to treat capital gains and dividends as ordinary income (albeit at a lowered top rate).  I believe that if Republicans are willing to put this on the table it would make major tax reform politically possible and really enable potential marginal rate decreases.

So again, assuming my world of no lobbyists and one where Boehner puts dividens/capital gains on the table, here is my plan in 5 easy steps:

1) As above, treat capital gains and dividends as ordinary income.
2) Cap charitable giving at 10% of income (ie a tithe).
3) Eliminate the mortgage interest deduction through a 5 or 10 year phaseout (ie 10/20% of value lost each year until it is gone).  If there is ever a time to get rid of the mortgage interest deduction it is right now with 3.5% 30 year mortgage rates.
4) Phase out state and local tax deductions over a ten year period.  There is no reason we should subsidize those who want to live in high tax/cost areas at the expense of those who don't (and yes, that is how it works).
5) Phase out the child tax credit over ten years (ie $100/year).

The tax exemption for employer provided health insurance would stay (its elimination would be way too regressive), but I would eliminate most other "minor" deductions in order to get more rate savings (and simplicity in the code).

The end rates would vary (and would actually decline each year through the phaseouts) depending on how much of the eliminated tax expenditures would be used to lower rates vs raise revenue (Simpson-Bowles used a 90-10 split, with 90% going to lower rates).  I would also suggest we go down to 3 brackets (say up to $100k, 101k-999K, and over $1 million) to keep things simple.  Obviously, there would be some standard deduction/exemptions still in play for those that don't itemize (which would be almost everyone in 10 years) and to keep the code more progressive .  

Seems to me this could be a pretty easy basis for tax reform that would allow for economic adjustments due to the gradual nature of the phaseouts.