Finally, A Concrete Income Tax Simplification & Reform Plan That Makes Sense!

Continuing the post from yesterday about the ideas put forth by the co-chairmen of the Obama Administration’s deficit reduction commission, I skimmed through the 50-page presentation (you can do the same here if you would like to) and there is a lot to like in it. One of my favorites is a real, well thought out plan to simplify the U.S. income tax code. I mentioned in my last post why I think the mortgage interest deduction is ridiculous, but the whole code is too complicated with so many brackets, schedules, and deductions.

One of the things that bothers me the most is that income is taxed differently depending on how you earn it. Shouldn’t a dollar of income be considered a dollar of income, regardless of whether you are an employee earning a fixed salary, a CEO who cashes out stock options, a retiree who lives off of dividend payments, or a hedge fund manager who trades stocks for a living? Our current tax code essentially tells us that certain ways of earning a living are better than others by rewarding them with lower tax rates. It doesn’t make sense that George Soros or Warren Buffett should ever be in a lower tax bracket than their secretaries, but today they are.

But maybe there is hope. The co-chairs of the commission put forth three options for fundamental simplification of the tax code and one of them really stands out to me. They propose eliminating all tax deductions, treating all income as ordinary income (rather than having dividend income and capital gains income be taxed at lower rates), reducing the total number of tax brackets from six to three, and best of all, dramatically reducing income tax rates for everyone to make up for the loss of deductions.

Here is the slide in the presentation that summaries this option:

As you can see, we are left with three individual income tax brackets (8%, 14%, and 23%) along with a reduction in the corporate rate (which will serve to boost stock prices and declared dividends).

Does anyone else think that treating all income the same and taxing it at 8, 14 or 23% makes a lot of sense? I know people will have to give up their standard deduction or several itemized deductions (such as mortgage interest and charitable donations) but look at those rates! Not only would it be hard to argue that the government was taxing us too aggressively, but without deductions you can bet that your tax return will be confined to a single page and take a lot less time to prepare. And most importantly, this recommendation is included in a comprehensive plan that reduces the deficit to 2.2% of GDP by 2015 and eventually balances the budget.

I know it will never fly with the politicians but I am going to hold out hope anyway as it is exactly the kind of plan that I would create if given the power to do so.