A top Republican priority in this session of Congress has been on “tax reform”. Yet, we know instinctively that when a Republican preaches tax reform that the resulting changes will help those at the top and hurt the lower and middle classes.
Two of the proposals you most often hear about are the FAIR tax and the “Flat” tax. The FAIR tax is a national sales tax of 23%, which is shockingly regressive and would really hurt the growth of our economy by discouraging spending on goods and service. The “flat” tax has been made popular by the ultra-wealthy Republican Steve Forbes and advocates a single tax rate on income. While the flat tax on the surface may sound like a good idea, it is yet another regressive scheme to help the wealthy avoid paying taxes. Under the flat tax, capital gains, interest, dividends and income from flow-through businesses are untaxed while salaries, wages and other earned income are taxed. Corporate income taxes are entirely eliminated.
Democrats are often attacked for having “no ideas” (although the Republicans have the power to stop any Democratic legislation from coming to the floor for a vote). Thankfully, Senator Ron Wyden of Oregon has come up with a plan to reform a tax system is a way that truly reflects Democratic values. It succeeds in addressing four core tax ideas that Democrats can agree on:
1) a simpler, more efficient tax system
2) a more progressive tax system
3) a tax system that doesn’t reward wealth over work
4) a cut in taxes for the middle and lower class
Senator Wyden’s plan eliminates the Alternative Minimum Tax (AMT) while downsizing the Form 1040/Schedule A to one page (30 total lines). The various itemized deductions of the current Schedule A are pared down to deductions for mortgage interest and charitable contributions, while providing a 10% tax credit for state taxes paid (including real estate taxes, sales taxes, state income taxes, and state personal property taxes). The plan lowers the number of marginal tax brackets down to three, with rates of 15%, 25%, and 35%. The standard deduction is increased while the Earned Income Credit (EIC) for low-wage workers is maintained. A copy of a proposed 1040 form can be viewed here:
New Form 1040
http://wyden.senate.gov/PDF%27s/Wyden%20Fair%20Flat%20Tax%20Act%20-%20Sample%201040.pdfPerhaps one of the most appealing aspects of Senator Wyden’s plan is that all income will be treated equally. Thus, income from interest, dividends, short-term and long-term capital gains, and flow-through income will be treated exactly the same as income from salaries, wages and commissions. We as Democrats often talk about how Republicans value “wealth over work”, and Senator Wyden’s tax reform plan would change that. In addition, families with income up to $150,000 would receive a tax cut under this plan (so much for the meme about Democrats raising taxes on the middle class).
The corporate tax rate is set at a flat tax of 35%, with many current loopholes being closed to make sure corporations pay their fair share. Taking all the changes into account, the new tax reform is projected to reduce the federal deficit by $100 billion over the next 5 years.
I have been waiting for Democrats to roll out a sensible tax reform plan, and I am very pleased at Senator Wyden’s plan. If I had to write an ideal tax reform legislation, it would be almost exactly the same as this. Does this have any chance of getting through the Republican-controlled Finance Committee? Likely not. But this seems like a great piece of legislation that Democrats can run on in future campaigns to counter the Republicans’ calls for tax reform. This legislation beats them at their own game. You can read the text of the legislation here:
Fair Flat Tax Act of 2005
http://wyden.senate.gov/PDF%27s/Wyden%20Fair%20Flat%20Tax%20Act%20-%20Legislation.pdf
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