Better Tax Plan : Huckabee or Bachmann The answer : Neither

Republican Presidential candidate Mike Huckabee is getting some publicity for embracing the FAIR TAX . The Fair Tax is an idea that has been around for a while and those in Minnesota’s First District will remember as it was part of Gil Gutknecht’s standard campaign stump speech. John Linder (R-GA) has been the prime sponsor since offering the legislation in July 1999. He has reintroduced substantially the same bill in each subsequent session of Congress. The current bill is HR 25 and currently has 68 co-sponsors (none from Minnesota although Collin Peterson was the prime co-sponsor in 2001.)

In short, the idea is to eliminate income tax by shifting all taxes (including Social Security and Medicare) to a national sales tax.
It’s a good talking point for Huckabee but legislatively, it is Dead On Arrival. Why? Simple, remember George Bush’s campaign theme “There’s nothing better than a fellow citizen opening up their door and saying, welcome to my home; welcome to my piece of property.” … the ownership society. Although, Bush also campaigned to make the tax code simpler, fairer and better able to promote economic growth, his President's Advisory Panel on Federal Tax Reform recommended “lowering the mortgage-interest cap, which is the amount of a loan on which homeowners would receive a tax break for interest paid, from $1 million to the average regional housing price in the range of $227,000 to $412,000.

Would Congress follow the panel’s recommendations ?

No. The Mortgage Debt Relief Forgiveness Act of 2007 now is based on a principal residence up to $2 million.

As this commentary clearly states : “Wealthy households are most likely to own homes and to itemize deductions. Half of all homeowners do not claim deductions at all. Tenants, of course, don’t even qualify. As a result, 62 percent of households with incomes above $200,000 receive a mortgage interest tax break, averaging $7,219. In contrast, only 3.5 percent of households with incomes between $10,000 and $20,000 receive any subsidy, averaging $317. If anything, these tax deductions help push up housing prices artificially, especially at the upper end, because homebuyers include the value of the tax subsidy in their purchase decision. This leads wealthy homeowners to buy bigger houses than they would without the tax breaks.

So, the FLAT TAX is DOA.

So, if Congress won’t embrace the FLAT TAX, what are they working on ?

The Taxpayer Choice Act “ would make permanent the current capital gains and dividends tax rates and create a voluntary Simplified Tax that would give individuals the option of paying under a highly simplified income tax system or under the regular income tax as it is structured now.

As a main sponsor, Minnesota’s Congresswoman Michele Bachmann issued a press release that the system needs to be changed to “give taxpayers the ability to choose how they wish to pay federal income taxes: 1) through the regular income Tax Code as it is currently structured; or 2) through a "Simplified Tax" that has just two income tax rates: 10 percent for joint income below $100,000 and 25 percent for income above. The Simplified Tax also includes a generous standard deduction of $25,000 for married couples, or $12,500 for individuals and a personal exemption of $3,500. The combination is equivalent to a $39,000 exemption for a family of four.

Now the first reaction is how will this be paid for ? The national debt is rising and the Bush tax cuts are not reducing the debt (see last paragraph).

Second, if the Simplified Tax is elected, income offsets such as those listed on Schedule A Deductions (home mortgage, property tax, medical, etc.) as well as Earned Income Tax credits (Child credits) are eliminated. Thus taxable income would be the same as gross income ( for many that are their wages) with the allowance for the Standard Deduction and Personal Exemption.

Third, once a taxpayer made the choice to switch, it could only be switched back once more during their lifetime unless there is a change in martial status (or death.)

Fourth, the winners win more (or the rich get richer.) The current tax system includes rates at 28%, 33% and 35% levels (which effectively start after the Adjusted Gross Income is over $123,700 for Married filing jointly). So, if you are in the highest bracket, under the Simplified Tax, the rate would be 25%.

Fifth, even if you do not elect the Simplified Tax, the legislation makes the Capital Gains and Dividends rate cuts permanent (they were scheduled to expire in 2009.) A review of IRS records indicate that “13,776 tax filers with adjusted gross incomes in excess of $10 million — a mere 0.01 percent of all filers — received 28.2 percent of the total tax savings. Their average tax break was $1,876,280 each. The affluent win again !

Sixth, if the objection to the current tax system is that it is too complex and filled with subsidies and special allowances, then how is adding one more system going to make it simpler?

The real problem with the Taxpayer Choice Act is that some members in Congress are falling for it. HR 3818 has 86 co-sponsors (including John Kline but no other Minnesota Congressmen) which is more than the FLAT TAX proposal.

The Republican ace in the hole for elections is Tax fear-mongering. As the campaigns start, voters will hear about the Taxpayer Choice Act, but not the nuts and bolts of how it works … and that will be combined with chants that “those Democrats will raise your taxes.”

Now, I am not a Democrat … I am a fiscal conservative … I am also a realist.
Here’s the real truth :
From fiscal 2002 through 2006, on-budget federal deficits totaled $2.4 trillion, including $836 billion borrowed from the Social Security Trust Fund and spent on other government programs.
The largest cause of these enormous deficits has been the remarkable drop in personal income taxes, which fell from 10.1 percent of the gross domestic product in fiscal 2000 to an average of only 7.3 percent of the GDP in fiscal 2002 through 2006 — a 28 percent drop. In fact, income tax revenues have been at or near their lowest levels as a share of the GDP in 55 years.

Bachmann’s plan will make the problem worse.