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Wednesday, February 26, 2014

House GOP Releases Tax Reform Plan

Tax Reform LogoThe House Ways & Means Committee Republicans today released a tax reform plan, The Tax Reform Act of 2014:

Press and blogosphere coverage:

http://taxprof.typepad.com/taxprof_blog/2014/02/house-gop.html

Congressional News, Tax | Permalink

Comments

Although Tax Reform is a wonderful concept, it is a proven Bait and Switch in reality.

After only five years of the low rates promised by the 1986 Tax Reform, the Democrats gained political control in 1993 and immediately poisoned the well on Tax Reform and on future fiscal Grand Bargains by forcing through large retroactive increases in tax rates without one single Republican vote. For Democrats, Tax Reform was and will always be nothing more than useful groundwork for large tax increases.

The only truly lasting legacy of the 1986 Tax Reform was its shameless endorsement of phase-outs, the AMT, and other gimmicks designed to conceal its actual marginal tax rates.

Tax Reform will make political sense only in the context of a durable, enforceable Grand Bargain which fully and permanently closes the fiscal gap. That could only happen when the public insists on austerity and fiscal balance rather than free money and lower taxes. In other words, the public needs to force politicians to be fiscally responsible, raising taxes and breaking past promises on spending. Short of full scale war, I'm not aware of any historical example of public support for the required level of pain.

Posted by: AMT buff | Feb 26, 2014 3:34:44 PM

Aside from the likelihood of a subsequent tax rate increase, there are matters of both principle and practicality.

I ran some preliminary numbers today. I'd pay 30% more federal tax, mostly due to complete loss of deductions for state and local taxes and the plan's 50% reduction of pretax retirement plan contributions. There is a simplification in that I'd finally be taking the standard deduction, but that's not worth a 30% tax increase.

What's more frightening is to consider that California and most other states would be certain to adopt Camp's newly expanded definition of taxable income without reducing the state income tax rates. My state income taxes would increase by more than 30%, with no federal deduction to soften that blow.

These increases are without anything exceptional on my tax return. Just regular old itemized deductions and pretax retirement contributions at the current maximum. Yet Camp wants to soak me, a perfectly ordinary taxpayer using perfectly ordinary tax breaks.

Incidentally, Camp's rate structure has a bubble, just like the 1986 Tax Reform Act. Without considering phase-outs (e.g., assuming only the standard deduction is used) the rates are 10%, 25%, 30%, 40%, then 35%. The 30% and 40% result from phaseout of the benefit of the lowest bracket at a 5% rate, same as in the TRA86.

The 30% rate starts are $300k MAGI and ends at $513.6k MAGI, where MAGI adds back employer-paid health care and pretax retirement contributions plus all the other items traditionally included in MAGI. In effect, the 5% bubble tax is a tax on gross income, not on taxable income. I regard such taxes as fundamentally dishonest and unprincipled.

How dispiriting. If this sort of chicanery is the best we can do with Tax Reform, let's just bury it without a marker.

Posted by: AMT buff | Feb 26, 2014 6:19:54 PM