Higher Tax Rates for Most, Breaks for Some
November 2, 2005
By DAVID CAY JOHNSTON
nytimes.com
The primary proposal by President Bush's tax advisory commission should please stock market investors, taxpayers in the very highest bracket and families with many children. But it may not be so popular with investors in bonds, entrepreneurs, farmers, owners of expensive homes, people in places with high local taxes and charitable donors.
All but the top 1 percent of Americans would have higher tax rates, but for some higher-income taxpayers this would be offset by eliminating the alternative minimum tax.
The proposals would also introduce the first tax breaks based on geographic location, basing the home mortgage tax break on the average home price in each market.
The commission says its proposals will make the tax system simpler and fairer, will raise the same amount as existing law, and will not appreciably shift the tax burden among various income groups in the first decade. But individual taxpayers could face huge cuts, or increases, depending on their circumstances.
The commission issued two proposals. The first would simplify the income tax; the second would go further toward encouraging savings and investment. Tax experts said that both proposals faced a lot of resistance but that only the first proposal had any chance of enactment.
The biggest new tax breaks in the main proposal would go to stock market investors. They would collect most dividends free of tax, as opposed to the 15 percent tax rate that now applies to most dividends.
In addition, 75 percent of profits from the sale of stocks held for more than a year would be tax-free. The effect would be to nearly halve the rate for the highest-income taxpayers, to 8.25 percent from 15 percent.
The commission emphasized that its rationale for such changes was to get Americans to save more and borrow less. Such policies could prompt a one-time rise in share prices to adjust for the tax benefits.
These cuts are also intended to offset the taxes that corporations pay on profits, said Jeff Kupfer, the commission's executive director. But changes in federal law since 1986 and tax sheltering have reduced, and at times eliminated, taxes for most companies.
Investors who put their money into assets other than stocks would not fare so well. Gains from the sale of all other assets, including businesses, farmland and paintings, would be taxed at the same rate as wages.
Thus, a taxpayer in the top bracket who sold stocks for a $1 million profit would pay no more than $82,500 in taxes, while someone who made the same profit from selling a business, a farm or a Monet would pay four times as much. Under current law, most investors would pay $150,000.
Scott A. Hodge, president of the Tax Foundation, a nonprofit group that seeks lower taxes, called the proposal "an incentive to buy stocks and a disincentive to be an entrepreneur."
The panel would repeal the alternative minimum tax, which was enacted 36 years ago to make sure that those making the equivalent of $1 million or more in today's dollars could not escape taxes. The tax has instead become a significant burden on families making as little as $75,000, taking away part or all of their Bush tax cuts.
To replace lost revenue from the alternative tax, the panel is proposing to eliminate deductions for state income taxes and property tax deductions taken by homeowners, which would hit people in higher-income, higher-tax states hardest.
The panel would also raise to 15 percent from 10 percent the tax rate on the first $7,300 of taxable income this year for individuals and $14,600 for married couples. Taxpayers with incomes higher than this would also be affected by this higher rate.
The panel would also raise to 30 percent, from 28 percent, the rate that this year applies to individuals making as little as $70,000 and couples making as much as $178,000.
The 35 percent tax rate, which applies only to the top 1 percent of taxpayers (incomes above $326,450 now), would be cut to 33 percent.
However, for individuals, the 33 percent rate would begin at a much lower level of income, $100,001 instead of $150,150. Therefore, people in this income range would be paying a higher rate on their last dollars of income. In short, there would be higher marginal rates for most people making less than $326,450.
Behind these nominal rates, the commission said, are complex rules that deny many taxpayers various tax breaks and phase out their personal exemptions, resulting in actual tax rates that vary widely depending on one's circumstances. Because most of these rules would be repealed, the commission said, the overall effect would be to make the system simpler and fairer.
Families with many children also win. Because of the alternative tax, families with more than two children often pay higher taxes because they lose exemptions for their children. The panel would end this loss of exemptions and give everyone with children a $1,500 tax credit for each one under age 20 until taxes were reduced to zero.
The vast array of retirement savings plans with varying rules would be simplified. The panel would let individuals put away $10,000 per year and married couples $20,000, with all earnings free of taxes and withdrawals exempt from tax. Currently, most higher-income Americans qualify for savings plans that defer taxes only until they withdraw the money.
Those now saving the maximum of $14,000 in 401(k)-style plans ($18,000 for those older than 50) would be allowed to save far less in tax-sheltered accounts. However, because withdrawals would be free of taxes, those whose retirement plans recorded large gains could end up with more spendable income.
The panel proposes to cut sharply the value of the home mortgage interest deduction for higher-income Americans, while giving a tax break to the roughly half of homeowners who do not itemize and get no subsidy on their mortgage interest.
The panel proposed a credit of 15 percent of the interest paid on mortgages, limited to the average home price in regional markets. The tax credit maximums would range from $2,043 to $3,708 on maximum mortgage values of $227,000 to $412,000.
A credit gives taxpayers the same benefit regardless of their income or tax rate. Currently, the higher a person's income and tax bracket, the bigger the mortgage tax break.
Today anyone with the maximum tax-favored mortgage debt of $1.1 million at 6 percent interest and who is in the top tax bracket saves $23,100 in income taxes, while someone making $50,000 who does not itemize gets no tax break from his mortgage. Someone with a $50,000 mortgage who does not now itemize would get a $450 tax break under the proposal.
The panel also wants to deny a tax break for the first 1 percent of income donated to charities.
* Copyright 2005 The New York Times Company |
