Wednesday, October 19, 2005

Planning Ahead

There's always somebody who is paid too much, and taxed too little - and it's always somebody else.
--Cullen Hightower

John Lennon wrote a song that proposed a "world with no countries…nothing to kill or die for…"

President George Bush's tax panel is imagining a drastically simplified income tax system that would eliminate most deductions, credits, savings incentives and other tax breaks, replacing them with a few simpler benefits. Oh, we’d pay about the same amount of tax under the kinder, gentler system as we do now, sans most of the confusing tax paperwork, and complex equations that could give even Einstein a headache would be simplified.

This is huge.

The marching orders for the panel were to make recommendations for different tax methods that make income taxes a fairer, simpler and more economically productive system. The final report is due Nov. 1.

Here’s my recommendation: Eliminate the “income” in the formulas.

What are on the table are savings accounts for retirement and major family, and a shrinking of the number of income tax rates from six to four. This would place 75% of individuals and families in the bottom 15% tax bracket. Gone would be the AMT—the alternative minimum tax, and you would not pay tax on roughly three-quarters of the capital gains on corporate stock.

These wonderful developments come with a price: also gone would be the federal tax deduction for state and local taxes, and all those personal and family tax breaks would be replaced with one family credit. Ditto for benefits and savings accounts for retirement, health and education, which would be slimmed to just three savings accounts, funded with after-tax income, but grown and withdrawn tax free.

And what of that most sacred of cows, the tax deduction for mortgage interest? It would become a tax credit, and the size of eligible mortgages would be subject to limits set by the Federal Housing Administration. That’s a clever slight of hand. Get out last year’s 1040 and reverse your mortgage deduction, add it as a credit, and see how your taxes would have changed…

From the “What’s Good for the Goose is Good for the Gander” Dept, health benefits provided by your employer would be the same as what’s provided to members of Congress: tax free up to $11,500 for families and $5,000 for individuals.

The new plan does retain the earned income tax credit, but will offer you the option of letting the IRS make that complicated calculation.

No comments: