Thursday, 27 October 2005

Progressive Tax Reform Introduced

Ron Wyden, Oregon's Democratic Senator, should earn special kudos for his bold tax plan, the “Fair Flat Tax Act of 2005”, which he introduced this morning. Here is a bold approach to real reform of the tax code which has much to recommend it to both progressives and fiscal conservatives.

Wyden doesn't cave to the flat tax purists, retaining a three tiered progressive rate structure. He also retains the most popular deductions, such as home mortgage (a political necessity, though not truly progressive), child tax credit, and charitable deductions, but does away with a lot of the gratuitous special favor exemptions which have complicated the code over the years. The claim is that those making under $150,000 will see a tax break with this plan, and yet the budget gains $100 billion dollars over all. A large part of this increase is due to the plan's institution of a flat corporate tax rate which would undo the myriad of exceptions currently in place, as well as taxing dividend and capital gains income at the same rate as earned income.

Of course the investment community will squawk about any increase in capital gains taxes, and how that will dampen investment, but I don't believe it for a minute. Those inclined to invest and trade stocks are not going to stop simply because their gains will be taxed at a somewhat higher rate, and those who have modest gains will no longer have to wade through convoluted worksheets and formulas on their Schedule D all for the possibility of saving $17.13. For great specifics on the actual economic impact of this plan, I recommend Steve Novick's excellent article at Blue Oregon. Novick notes that "Studies of capital gains tax cut proposals at the Federal level have repeatedly disproved the economic arguments for capital gains tax cuts", and cites some details of several of these studies.

Other positive features are a credit against state income and sales tax which can be taken advantage of without itemization, and a simplified form that will enable many taxpayers to file a one page return. Now I would have liked (scroll to bullet points) to see charitable contribution deductions to move off of the itemized page as well, but I did not see that mentioned in the summary on Wyden's Senate page.

I don't think Wyden's plan has much chance of passage as long as the Republicans control both houses, but it can be a rallying point for Democrats in the upcoming campaigns, and in staving off unfounded charges that they lack ideas.

Thanks to Kari Chisholm of Mandate Media for alerting me to this wonderful proposal.

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