Any tax reform that lowers the top rate and scraps deductions should be rejected

[Mr.Phips]

Both of these things simply lead to more tax breaks for the rich, which is something that is not needed right now, when income inequality continues to mushroom.  

The middle class rely on important itemized deductions like the mortgage interest deduction, the state and local tax deduction, as well as the deduction for regressive property taxes that are paid.

A middle class family would be hurt far more by getting rid of the mortgage interest deduction far more than a multi-millianaire because the wealthiest people are far more likely to buy their homes with cash and even if they do have a mortage, the interest is almost always a far lower percentage of their income than a middle class taxpayer.  

Same with the property tax deduction.  Property taxes almost always make up a far higher percentage of a middle class taxpayer's income than that of a wealthy taxpayer.  

What should be done is to lower rates for the middle class(those earning under $100,000 a year) and create a 50% top marginal bracket for those making over $5,000,000 a year.  Additionally, I would propose taxing capital gains and dividends at the same rates as ordinary income.  

The corporate side is where I would lower the rates.  Taxing dividends and capital gains at the ordinary levels for individuals pays for this along with a heavy excess retained earnings tax(to discourage cash hoarding).

Any tax "reform" that lowers the top rate and eliminates needed deductions should be blown up by Democrats.  

[Redalgo]

I am mixed on this one, honestly. The top marginal rate you mentioned sounds good, and I'd be eagerly willing to go along with your proposals for capital gains and dividends provided no strong counterarguments pop up, yet I do not feel the middle classes are paying enough in tax right now and would be alright with eliminating most if not all deductions.

[Mr.Phips]

I am mixed on this one, honestly. The top marginal rate you mentioned sounds good, and I'd be eagerly willing to go along with your proposals for capital gains and dividends provided no strong counterarguments pop up, yet I do not feel the middle classes are paying enough in tax right now and would be alright with eliminating most if not all deductions.

The middle class is very squeezed and has seen their income after inflation and compared with the wealthy, drop considerably since the early 1980's.  They need a break.  Ideally, those making under $50,000 would be paying basically no tax.  This would be done with a combination of lower bottom rates and increased standard deductions and dependent and personal exemptions. 

[DC Al Fine]

I mostly agree with your proposal. One small quibble though

The corporate side is where I would lower the rates.  Taxing dividends and capital gains at the ordinary levels for individuals pays for this along with a heavy excess retained earnings tax(to discourage cash hoarding).

Any tax "reform" that lowers the top rate and eliminates needed deductions should be blown up by Democrats.  

That is just begging for creative accounting or the money to be spent foolishly. Excellent idea on taxing capital gains/dividends as ordinary income. This would solve much of rich not paying enough taxes problem.

[Blue3]

Just limited the morgage interest deduction to only one residency.

There are ways to scrap/limit the deductions and credits without hurting the middle class.

[opebo]

50% is awfully low.

[Grumpier Than Uncle Joe]

50% is awfully low.

Tell that to the rich Frenchies who would take 50% in a minute.

[MyRescueKittehRocks]

How about a 9.75% sales tax rate nationally and no income tax?

[King]

How about a 9.75% sales tax rate nationally and no income tax?

If you enjoy a tax hike sure.

90% of the tax burden for most people is how difficult it is to file.  Real tax reform would collect the same money from the same places with less paperwork. 

[krazen1211]

http://www.whitehouse.gov/issues/taxes

That is why President Obama has called on Congress to enact comprehensive tax reform that meets the following five principles:

1. Lower tax rates.
The tax system should be simplified and work for all Americans with lower individual and corporate tax rates and fewer brackets.

[Indy Texas]

How about a 9.75% sales tax rate nationally and no income tax?

If you enjoy a tax hike sure.

90% of the tax burden for most people is how difficult it is to file.  Real tax reform would collect the same money from the same places with less paperwork. 

It is not difficult to file your taxes. Have you never heard of FreeFile/eFile on the IRS website? If you make under something like $50,000, you can file your taxes for free online, either with a PDF form you fill in or through H&R Block/TurboTax/etc. And if your state has an income tax, you can file that through them at the same time, also for free. The whole thing takes maybe 20 minutes and is practically idiot-proof.

It boggles my mind when I drive through poor neighborhoods and see a tax prep place on every corner charging absurd fees and pushing refund advances at 300% APR on people. I can sympathize with people who get into the payday loan racket because they literally have no other way of getting credit, but this is just dumb. Why would you pay some urban entrepreneur $150 to do a service for you that you can get absolutely for free somewhere else?

[Torie]

Deductions are worth far more to me than you guys out of box. The higher your tax rate, the more the value of the deduction. Heck maybe close to half of taxpayers get no deductions, because they claim the standard deduction. The whole thesis here is flawed. The middle class in the US is one of the most "under-taxed" in the world by the way, which is in part generating the fiscal crises, but I digress.

Dumping deductions, while lowering rates also leads to less tax incentives to make economically inefficient decisions, because the cost of the inefficiency is less than the value of the deduction favoring such inefficiency. Thus more buy homes than they "should." More invest in real estate than they "should." Charities are subsidized. And the cost of farmland is inflated.

[Sbane]

Deductions are worth far more to me than you guys out of box. The higher your tax rate, the more the value of the deduction. Heck maybe close to half of taxpayers get no deductions, because they claim the standard deduction. The whole thesis here is flawed. The middle class in the US is one of the most "under-taxed" in the world by the way, which is in part generating the fiscal crises, but I digress.

Dumping deductions, while lowering rates also leads to less tax incentives to make economically inefficient decisions, because the cost of the inefficiency is less than the value of the deduction favoring such inefficiency. Thus more buy homes than they "should." More invest in real estate than they "should." Charities are subsidized. And the cost of farmland is inflated.

This is true. My parents just sold their home in the Bay Area, and thus now will start getting hit by higher taxes since they can't deduct that from their income. Now they are thinking of buying a condo and renting it out to lower the amount of income subject to a tax. Wouldn't it be great if deductions were capped at a lower amount so they wouldn't have an incentive to do that and if tax rates were lowered on their income up to say 150-200k (I think the rates above that should remain the same even with a deduction cap. The rich do need to be soaked a little more.)?

[Torie]

Deductions are worth far more to me than you guys out of box. The higher your tax rate, the more the value of the deduction. Heck maybe close to half of taxpayers get no deductions, because they claim the standard deduction. The whole thesis here is flawed. The middle class in the US is one of the most "under-taxed" in the world by the way, which is in part generating the fiscal crises, but I digress.

Dumping deductions, while lowering rates also leads to less tax incentives to make economically inefficient decisions, because the cost of the inefficiency is less than the value of the deduction favoring such inefficiency. Thus more buy homes than they "should." More invest in real estate than they "should." Charities are subsidized. And the cost of farmland is inflated.

This is true. My parents just sold their home in the Bay Area, and thus now will start getting hit by higher taxes since they can't deduct that from their income. Now they are thinking of buying a condo and renting it out to lower the amount of income subject to a tax. Wouldn't it be great if deductions were capped at a lower amount so they wouldn't have an incentive to do that and if tax rates were lowered on their income up to say 150-200k (I think the rates above that should remain the same even with a deduction cap. The rich do need to be soaked a little more.)?

The economically "efficient" rule would be to allow mortgage interest deductions without a cap on your personal residence, but offset that deduction with the imputed value of your home as a rental, since you are basically renting the house to yourself as both the landlord and the tenant, but the rental "income" is not taxed. I say this because if you have the cash, and mortgage interest is not deductible on your home, then you have an incentive to not have the mortgage, and pay all cash, because otherwise that cash will be generating taxable income, while the mortgage that allows you to have that cash, involves the payment of interest that you cannot deduct. The cost of money should be deductible always.  The same is true really for any such debt, including say credit card interest, which involves the same principle, although at a 20% interest rate, that is a bit rich, so only the interest cost should be deductible which represents the cost of close to a risk free loan, not a risky one, or one charging a predatory interest rate. Are you following all of this?

I oppose all deductions for state and local income taxes. That is just a subsidy to the localities from the Feds (and again favors high tax bracket taxpayers). Such subsidies should again be means tested, not across the board. In other words, Mississippi gets money, but Connecticut does not.  So the property taxes on your home that is not rented out generating taxable rental income should not be deductible.

Make sense?  Of course, most of this will never happen.  

[King]

How about a 9.75% sales tax rate nationally and no income tax?

If you enjoy a tax hike sure.

90% of the tax burden for most people is how difficult it is to file.  Real tax reform would collect the same money from the same places with less paperwork. 

It is not difficult to file your taxes. Have you never heard of FreeFile/eFile on the IRS website? If you make under something like $50,000, you can file your taxes for free online, either with a PDF form you fill in or through H&R Block/TurboTax/etc. And if your state has an income tax, you can file that through them at the same time, also for free. The whole thing takes maybe 20 minutes and is practically idiot-proof.

It boggles my mind when I drive through poor neighborhoods and see a tax prep place on every corner charging absurd fees and pushing refund advances at 300% APR on people. I can sympathize with people who get into the payday loan racket because they literally have no other way of getting credit, but this is just dumb. Why would you pay some urban entrepreneur $150 to do a service for you that you can get absolutely for free somewhere else?

Yes, for low middle income individuals, taxes are not difficult.  For those who have to itemize and for small business owners, there are hassles.

[Indy Texas]

How about a 9.75% sales tax rate nationally and no income tax?

If you enjoy a tax hike sure.

90% of the tax burden for most people is how difficult it is to file.  Real tax reform would collect the same money from the same places with less paperwork. 

It is not difficult to file your taxes. Have you never heard of FreeFile/eFile on the IRS website? If you make under something like $50,000, you can file your taxes for free online, either with a PDF form you fill in or through H&R Block/TurboTax/etc. And if your state has an income tax, you can file that through them at the same time, also for free. The whole thing takes maybe 20 minutes and is practically idiot-proof.

It boggles my mind when I drive through poor neighborhoods and see a tax prep place on every corner charging absurd fees and pushing refund advances at 300% APR on people. I can sympathize with people who get into the payday loan racket because they literally have no other way of getting credit, but this is just dumb. Why would you pay some urban entrepreneur $150 to do a service for you that you can get absolutely for free somewhere else?

Yes, for low middle income individuals, taxes are not difficult.  For those who have to itemize and for small business owners, there are hassles.

From your statement about how "difficult it is to file" I assumed you were referring to the act of specifically filing one's taxes.

Again, there is tax software and bookkeeping software, there are printable W-2s available at your local office supply store, that should do for a very small business owner. If you're bigger than that, get an accountant.

I agree that filing taxes isn't "simple" for a small business owner, but I disagree with the idea that a flat tax or fewer rate brackets would solve that problem. If anything, that's one of the easier parts of doing taxes - they even give you a little table that shows you what rate you're in and how much you owe.

[Sbane]

Deductions are worth far more to me than you guys out of box. The higher your tax rate, the more the value of the deduction. Heck maybe close to half of taxpayers get no deductions, because they claim the standard deduction. The whole thesis here is flawed. The middle class in the US is one of the most "under-taxed" in the world by the way, which is in part generating the fiscal crises, but I digress.

Dumping deductions, while lowering rates also leads to less tax incentives to make economically inefficient decisions, because the cost of the inefficiency is less than the value of the deduction favoring such inefficiency. Thus more buy homes than they "should." More invest in real estate than they "should." Charities are subsidized. And the cost of farmland is inflated.

This is true. My parents just sold their home in the Bay Area, and thus now will start getting hit by higher taxes since they can't deduct that from their income. Now they are thinking of buying a condo and renting it out to lower the amount of income subject to a tax. Wouldn't it be great if deductions were capped at a lower amount so they wouldn't have an incentive to do that and if tax rates were lowered on their income up to say 150-200k (I think the rates above that should remain the same even with a deduction cap. The rich do need to be soaked a little more.)?

The economically "efficient" rule would be to allow mortgage interest deductions without a cap on your personal residence, but offset that deduction with the imputed value of your home as a rental, since you are basically renting the house to yourself as both the landlord and the tenant, but the rental "income" is not taxed. I say this because if you have the cash, and mortgage interest is not deductible on your home, then you have an incentive to not have the mortgage, and pay all cash, because otherwise that cash will be generating taxable income, while the mortgage that allows you to have that cash, involves the payment of interest that you cannot deduct. The cost of money should be deductible always.  The same is true really for any such debt, including say credit card interest, which involves the same principle, although at a 20% interest rate, that is a bit rich, so only the interest cost should be deductible which represents the cost of close to a risk free loan, not a risky one, or one charging a predatory interest rate. Are you following all of this?

I oppose all deductions for state and local income taxes. That is just a subsidy to the localities from the Feds (and again favors high tax bracket taxpayers). Such subsidies should again be means tested, not across the board. In other words, Mississippi gets money, but Connecticut does not.  So the property taxes on your home that is not rented out generating taxable rental income should not be deductible.

Make sense?  Of course, most of this will never happen. 

Why do you think interest should always be deductible? And in any case wouldn't your idea lead to no lowering of tax liability in most cases. I think the vast, vast majority of people pay less interest on their mortgage than they could get back in rental income on that property. And if you allow deducting interest you have to pay to the bank, why not allow the "interest" you must pay the state to live on your piece of land (aka property taxes)?

Also what are your thoughts about California? Should it also not get money? I think many people in California, especially in Southern California, considering their income and the cost of living here need help. Connecticut, probably not. Perhaps not the Bay Area either, but costs there are even higher than Southern California.

[Torie]

I was discussing tax policy vis a vis economic efficiency. One can argue for public policy reasons for some inefficiency, although, no, most people probably pay more in mortgage interest than they could earn renting the house out after expenses  but prior to interest carry costs.

Adjusting means testing subsidies for regional cost of living indexes is a complex and difficult issue. It might be good public policy to encourage economic migration to lower cost areas, rather than subsidize the truncation of such migration. The devil is in the details.

[Sbane]

I was discussing tax policy vis a vis economic efficiency. One can argue for public policy reasons for some inefficiency, although, no, most people probably pay more in mortgage interest than they could earn renting the house out after expenses  but prior to interest carry costs.

I thought you meant deducting the entire rental income from the mortgage interest paid. Of course if you meant what the person gains after paying the interest on the mortgage, property tax and other expenditures, that is a different matter.

[Torie]

I was discussing tax policy vis a vis economic efficiency. One can argue for public policy reasons for some inefficiency, although, no, most people probably pay more in mortgage interest than they could earn renting the house out after expenses  but prior to interest carry costs.

I thought you meant deducting the entire rental income from the mortgage interest paid. Of course if you meant what the person gains after paying the interest on the mortgage, property tax and other expenditures, that is a different matter.

Yes, we are talking NOI here (net operating income before debt service other than principal pay down, to wit interest costs), not gross rental income.

[Mr.Phips]

Deductions are worth far more to me than you guys out of box. The higher your tax rate, the more the value of the deduction. Heck maybe close to half of taxpayers get no deductions, because they claim the standard deduction. The whole thesis here is flawed. The middle class in the US is one of the most "under-taxed" in the world by the way, which is in part generating the fiscal crises, but I digress.

Dumping deductions, while lowering rates also leads to less tax incentives to make economically inefficient decisions, because the cost of the inefficiency is less than the value of the deduction favoring such inefficiency. Thus more buy homes than they "should." More invest in real estate than they "should." Charities are subsidized. And the cost of farmland is inflated.

Someone earning $10,000,000 a year's deduction are going to be a far smaller percentage of their income than someone making around $50,000 a year.  Someone making $50,000 a year is going to have to have about $10,000 a year in mortgage interest, which is about 20% of their income, while someone making $10,000,000 a year couldnt possibly have more than $70,000 a year in mortage interest and even that would be less than one percent of their income.  Same with the property taxes.  Homes have a finite value, while income doesnt. 

[Torie]

And therefore ... ?

[Mr.Phips]

And therefore ... ?

The middle class would miss these deductions far more than the wealthy.

[Torie]

And therefore ... ?

The middle class would miss these deductions far more than the wealthy.

That is indubitably true - unless offset by lower rates. However, the pension plan rules are pretty heavily skewed in favor of high income earners (an above the line deduction), along with to a lesser extent, the deduction for state income taxes, until you hit really high levels of income, and such deductions are phased out.

[Mr.Phips]

And therefore ... ?

The middle class would miss these deductions far more than the wealthy.

That is indubitably true - unless offset by lower rates. However, the pension plan rules are pretty heavily skewed in favor of high income earners (an above the line deduction), along with to a lesser extent, the deduction for state income taxes, until you hit really high levels of income, and such deductions are phased out.

Pension plan contributions are limited to about $18000 a year and Ira deductions are limited to $5000 per person. 

Lower tax rates would just add fuel to the fire of the problem by giving the wealthy a further benefit.  In a addition to losing a deduction that didn't mean much to them anyway, they get their rates lowered.