The Fiscal Times, May 2, 2012
Why Reagan's Tax Reform Road Map Won't Work Now
by Eric Pianin and Michelle Hirsch
... The Tax Reform Act of 1986 achieved many
of the goals now being espoused by Republicans and Democrats. ... all sides
agree a major rewriting of the tax code will call for painful tradeoffs, and
likely will require heavy lifting well beyond what the Reagan White House
and a politically divided Congress did 26 years ago. ...
far different and more complex overseas tax picture today than in the late
1980s, a sharp rise in the number of pass through corporations, a fragile
economy, and far more partisanship and political gridlock than existed when
Ronald Reagan ...
... Ed Kleinbard, a tax law professor at the University
of Southern California ... "We need more revenues than the 2012 tax rules
would generate if extended.†...
It nearly halved the top marginal personal income tax rate, moved 5 million
low-income Americans off federal income tax rolls, and cut the top corporate
tax rate from 46 percent to 34 percent.
...
Equally unclear is how lawmakers intend to address the more than 90 percent
of U.S. businesses organized as pass-through entities, partnerships, and
sole proprietorships. ... the percentage of U.S. corporations organized as
pass-through entities grew from about 24 percent in 1986 up to about 69
percent in 2008. ... “If you’re going to take away a bunch of business tax
incentives, you have to figure out a way to make it tolerable for the people
who operate in pass-through form or sole proprietorship. That’s a real
sticking point,†said Clint Stretch, a managing principal at Deloitte Tax
LLP.
2-4-8 Response: For the Common Good
The article correctly notes the interrelationship of
corporate tax, pass-through business tax and individual taxes. When congress
enacts a loophole (a/k/a tax expenditure) for one it always harms the
others. Please consider the 2-4-8 Tax Blend - a comprehensive tax reform for
both individuals and business that can be defined in one sentence:
Tax individual and corporate income at a flat 8% rate
(with no deductions, credits or loopholes), tax individual net wealth at 2%
(excluding $15,000 cash and retirement funds) and impose a 4% Value Added
Sales Tax (VAT) on business.
For business the combined 8% income rates and 4% VAT
would be the lowest and most competitive business taxes of all the developed
countries. [The U.S. is the only developed country without a VAT]. The 8%
income tax rate also resolves the significant problem in the deferral of
taxes on foreign profits caused by imposing a 35% tax (less credit for
foreign taxes paid) when the money is brought back into the U.S.
For investors, the net wealth tax might seem
revolutionary by U.S. standards, but most high earners would willingly pay a
2% net wealth tax in exchange for eliminating the capital gains and estate
taxes and keeping 92% of taxable earnings. The ability to buy and sell
assets without being taxed on the gains would spur a new era of investment
freedom. The increased after tax income would also create wealth much faster
than a 2% net wealth tax could diminish it.
For workers, the elimination of the payroll tax and
reduction of the income tax rate creates an immediate boost in take home
pay. For example, a young family earning $70,000 currently pays combined
federal taxes of 19% but would take home $7,700 more with an 8% income tax
(assuming net wealth of under $30,000). This additional $641 per month
represents an enormous opportunity for both savings and consumption. The
$15,000 per person cash wealth tax exemption also encourages a responsible
level of liquidity. The retention of tax exempt retirement savings programs
recognizes the need for the elderly to have sufficient assets to supplement
social security. Current interest tax deductions for mortgages and student
loans are replaced by the ability to deduct the loan principal in computing
net wealth. This is the equivalent of a 2% reduction in the interest rate
and is arguably a better incentive for both home ownership and higher
education.
Eugene Patrick Devany, JD, MPA
www.TaxNetWealth.com
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