Flat-Out Case . . . Dual Option

Article excerpt


As another unpleasant April 15 is upon us, President Bush has promised the nation's beleaguered taxpayers that serious tax reform is high on his agenda.

The president's tax-reform panel, headed by former Sens. Connie Mack and John Breaux, has been hearing testimony about the pathologies of the current code. Tax experts are urging the panel to recommend major simplification, tax cuts on saving and reforms to make U.S. businesses more competitive in the global economy.

These goals could be accomplished by scrapping the income tax and installing the flat tax of former Majority Leader Dick Armey. But if the president's panel is seeking a more modest reform package, a good framework is the "dual-rate income tax."

Under the dual-rate plan, virtually all deductions and credits would be eliminated, and about 95 percent of families would pay a low 15 percent tax rate. A 27 percent rate would kick in for high earners above the Social Security wage cap of $90,000. The effect would be to provide a large tax-rate cut for middle-income families. For example, the marginal tax rate on singles with taxable income between $30,000 and $72,000 would fall from 25 to 15 percent.

The dual-rate plan would promote savings and economic growth by setting the top individual tax rate on dividends, interest and capital gains to 15 percent. The corporate tax rate would be cut from 35 to 15 percent. These changes would equalize and reduce the combined top rates on income from all sources.

Other features of the plan include retention of the earned-income tax credit, expansion of the personal exemption from $3,200 to $4,500 and liberalization of individual retirement accounts.

That sounds good, but what's the catch? The catch is that Mr. Bush wants tax reform to be revenue neutral, neither raising nor lowering overall taxes. As a consequence, there must be trade-offs. Under the dual-rate plan, individuals would get substantially reduced marginal rates, but they would give up current breaks such as the mortgage-interest deduction. This trade-off makes sense because the tax system would be simpler, it would treat people more equally and the lower tax rates would spur economic growth. …