Thursday, November 18, 2004

Suggestion for the Bush Tax Reform Plan

President Bush has indicated that he wants to simplify the tax code and create an ownership society. I share both aspirations, and offer this suggestion to correct an unfairness that has existed for a long time and allow people who don’t have much to invest, because of high taxes, a chance to participate in the ownership society.

Individuals pay more taxes than corporations with the same net income because corporation are able to deduct all expenses necessary to making a profit, while the limited exemptions and deductions afforded individuals don’t even cover their health insurance and state taxes, let alone basic living and transportation expenses. Data from a recent study by the Economic Policy Institute as computed from existing federal data for all states and metropolitan areas, show the realistic basic expenses of various households and the taxes they pay vs. what corporations pay. (See graph below) Because these costs have been tabulated carefully for many different family compositions and are region specific, such an exemption will be every bit as fair as the current complicated scheme of exemptions, deductions and credits. Families that earn just enough to cover essential expenses, that is, that have no net income over expenses, pay $800 to $1500 in federal income taxes.

We could simplify the tax code by giving individuals a realistic exemption for the basic income necessary to maintain their household, while retaining the option to itemize deductions if unusual expenses exceed this threshold. This would eliminate many households from the tax rolls, permit many others from having to itemize deductions, and allow all individual taxpayers to invest the savings in the ownership society. Once they are part of the ownership society, with low taxes on investment income, they will be less dependent on government handouts and not as dependent on their wages which are not keeping up increases in the GDP.

This change could be revenue neutral if the wide array of deductible expenses and tax loopholes were eliminated along with the increase in the exemption.

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