So you want to give middle income American’s a tax break which also simplifies the voluminous tax laws and regulations. Or at least make the tax system less tilted in favor of the richest Americans. Yet, there are elements of the current code which incent people to do things in the country’s best interest. I can think of three.
- Home ownership tax breaks (deductions of mortgage interest and property taxes) prop up an industry on which a growing U.S. economy depends.
- Charity as a major source of funding for the arts and those in need is unique to the American experience.
- To support a system of government services based on federalism, citizens pay taxes to multiple jurisdictions. Consistent with the finding in McCullough vs. Maryland, “The power to tax is the power to destroy.” Therefore, revenues paid to state and local governments should never be subject to federal taxation.
My point? Any tax reform proposal promising to eliminate deductions should consider three things sacred.
- Mortgage interest
- Charitable contributions
- State and local taxes
In fact they should increase the benefits for these items for the middle and lower class by converting these deductions to a 20 percent tax credit. In other words, regardless of your wealth or tax bracket any money used for the purpose of mortgage interest, charitable giving or state and local taxes would be subsidized by the federal government at a 20 percent rate. Consider the following examples.
- A family or four with taxable income of $10,000 that pays $5,000 in mortgage interest currently receives a $500 tax break (10 marginal rate times $5,000). Under this proposal, the same family would receive a $1000 tax break (20 percent credit against $5,000).
- In contrast, a family with taxable income of $400,000 that pays $50,000 in mortgage interest currently receives a $19,800 subsidy (39.6 marginal rate times $50,000). Under this proposal, the same family would receive a $10,000 tax break (20 percent credit against $50,000).
The same principle would be applied to the other two sacred categories: charitable giving and state/local taxes.
Next, a standard deduction (currently $12,700 for a married couple) and personal exemptions (currently $4,050) would apply to ALL taxpayers. Rather than doubling the standard deductions as suggested in the GOP framework, all tax payers would still be eligible for mortgage interest, charitable giving and state/local tax credits. In other words, all taxpayers would be rewarded for investing in America and Americans.
That only leaves the issue of tax rates and taxable income levels. To ensure any tax reform proposal is revenue neutral and does not accelerate growth of the national debt (as has been empirically proven of the George W. Bush tax cuts), I will leave the exact number to the Congressional Budget Office. But something in the range of five brackets seems to make sense. For illustrative purposes, it might look like this for a married couple filing jointly.
Taxable Income/Marginal Tax Rate
The decreased rates at the highest brackets would be offset by limiting tax deductions and converting any remaining tax incentives from deductions to credits.
And for you rich folks who still think this is unfair, just remember. You’ll also be saving a wad of cash due to the lower cost of accounting and legal services. Maybe you could give that extra cash to real charities (not conservative think tanks) or give your business and household employees a living wage. Just saying!
For what it’s worth.