Tuesday, November 01, 2005

You may remember that I wrote about this a couple of weeks ago.

Anyway, today it is official. The Bush tax reform committee came out with a package of proposals, submitted to the treasury department, which propose to 'simplify' taxes by deleting both the alternative minimum tax and a number of deductions, as well as reducing taxes on investment income.

The alternative minimum tax (AMT) was originally put in place to prevent very wealthy individuals from paying little or no tax due to the use of multiple deductions. Because the minimum amount of income needed to trigger it is not ever increased due to inflation or any other reason, what was 'wealthy' thirty years ago when it was passed has now become, thirty years of inflation later, 'upper middle class' so that some upper middle class families are getting dinged with the AMT. The proposal to do away with it, however, will only restore the problem it was designed to avoid in the first place-- very rich people being able to 'deduct' their tax all the way to zero (or below it, in some cases).

Reducing taxes on investment income is also targetted at the rich.

More troubling are some of the other changes (remember, this proposal is designed to be revenue-neutral, and the above proposals will lower revenue to the government. On the other side of the ledger:

1. Reduce mortgage interest deductions. Originally the proposal was to eliminate it entirely. The proposal in the plan is reduce the mortgage interest cap from $1 million under current law to the average regional housing price in the range of $227,000 to $412,000.

Now, here where I live, a $227,000 house is a nice house. My cousin, who lives inside the city of LA, has a decidedly middle class living standard but has a house (because of its location) which despite being relatively small and about thirty years old, is worth around a half million dollars. So, this cutting this deduction will get some middle class people, in addition to some moderately wealthy people.

But here is the kicker: The deduction would be converted to a credit equal to 15 percent of interest paid on mortgages up to the interest cap. Right now, if you are in a higher tax bracket (say the 28% bracket) your credit effectively comes off at that rate. But now it will come off at 15%. So in fact, this is a tax increase for a great number of homeowners.

2. All tax brackets, family credits and taxation of Social Security benefits for couples would be double those of individuals. Under the current system, some two-earner married couples filing jointly end up paying more in taxes than two single taxpayers with the same income because of the way various deductions, credits and tax brackets are structured.

There are two ways to achieve this. Either you raise the deductions for married couples, or you reduce them for single people. Watch this one closely, because remember this has to be revenue-neutral. So if someone gets a benefit, someone else will see a tax increase.

3. Reduce the tax breaks on employer-funded health insurance. As insurance premiums increase, sooner or later it will go over the limit and you will start paying tax on your premiums, even though you never actually see this money (it goes directly to your insurance provider).

4. taxpayers would no longer be allowed to deduct the state and local taxes they pay on wage income, investment income and property.

Now, if you notice the pattern, it is what happened in the Reagan era. It isn't about tax CUTS. It is about TRANSFERRING taxes from the wealthy to the middle class.

Most of the tax cutting has already been done. Now it is about finding cute ways to get the middle class to swallow a tax increase without blaming Republicans (who are in power, and this will be proposed by a Republican President to a Republican Congress.)

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