Gatsby's tax plan
Oregon's senior senator -- these days, he's also the darling of New York society -- has introduced a tax reform bill with a Republican co-sponsor. And the two of them are crowing about it loud and long. Finally, they tell us, the two parties are coming together with a tax plan that solves everybody's problems.
It's a big bill, and it covers a lot of ground, which makes a some journalists' eyes glaze over when they start to look at it. For convenience, the two sponsors have come up with a handy dandy two-page summary touting all the wonderful benefits of their plan, and that's as far as a lot of commentators have gotten so far. But it behooves us as constituents of one of the proponents of this plan to take a closer look.
Probably the first thing that jumps out of the Wyden-Gregg bill is the massive tax cut that it bestows on corporations. Instead of a top corporate tax rate of 35%, it installs a flat rate of 24%. In other words, if a corporation has been paying $7 million in taxes, it would now pay only $4.8 million. Math majors out there can see that it's a 31.4% tax cut for a highly profitable corporation.
Not to say that that's necessarily a bad thing, if you believe that corporate tax savings will trickle down to workers and consumers. But it's truly ironic that Oregon, which just stuck it to corporations on their state income taxes under Measure 67, would have a senator in Washington who's advocating giving them back way, way more than the extra they'll ever have to pay out here.
The treatment of capital gains -- gains on sales of business and investment assets -- would get tougher. Rather than the 15% top rate under current law, regular rates would apply, but there would be 35% exclusion of the gain. If I'm doing the math right, that works out to a top rate of 22.75%. Dividends on stocks would continue to qualify for capital gain rates, however -- a Bush Jr. innovation that the bill would make permanent. The bill would also expand to a small degree people's ability to put money aside into retirement and savings accounts and have the earnings on those investments in those accounts not be taxed at all.
On the other end of the spectrum, the bill would eliminate the 10% bracket currently applicable to low-income individuals. The Wyden plan would have three individual tax rates: 15%, 25%, and 35%.
Probably next in importance is what the bill does to individual deductions. It jacks up the standard deduction substantially, which means that low- and lower-middle-income folks will probably have lower taxable incomes. But it also means that fewer people will be deducting things like home mortgage interest and property taxes, which in turn diminishes the tax advantages of home ownership. For a country that's currently inflating housing prices by handing out four-figure tax credits to people just for buying a home, that seems like an odd move to make.
The next thing that catches our eye is the repeal of popular exclusions for all sorts of benefits that people currently receive tax-free in their workplaces. Under Wyden-Gregg, employees will pay tax on many nickel-and-dime items, and some bigger ones, that they are allowed to ignore for tax purposes under current law. For example:
* Employer premium payments on group term life insurance.
* Discounts that employers offer employees, such as in the retail business.
* Coffee and donuts in the work room.
* Free meals for on-call employees at such places as hospitals.
* Retirement planning advice supplied by the employer.
* Stuff employees take out of the supply closet at work to use on the job.
* Company-supplied uniforms and special gear.
* Gold watches and Cross pens presented on retirement.
The bill would also nix deductions for union dues, fees paid to tax professionals in connection with personal taxes, and employee business expenses that cheapskate employers don't reimburse. Not everybody gets to deduct these under current law, but under the bill, no one would. Job-related moving expenses would also not be deductible, and if your employer paid to move you to a new duty station, that would be taxable income to you.
The Wyden plan would also get rid of the ubiquitous "personal choice" and "flexible spending" accounts (technically known as "cafeteria plans"), whereby working folks currently get to pay for things like health care and child care out of pre-tax dollars. All those dollars would become taxable.
The bill would repeal the alternative minimum tax, and that would be a great relief for many folks who grapple with it and really shouldn't have to. The AMT was designed to make sure truly rich folks didn't load up on too many tax deductions, but nowadays it's penalizing middle-class people who merely make a decent living, live in a high-tax state, and have kids.
Wildest of all, the Wyden bill would legalize, regulate, and tax internet gambling. Perhaps that's thrown in there as a signal not to take any of this too seriously. You could spend a year monkeying around with that feature of the bill alone -- and with this Congress, make it three or four years.
When considering the chances of this package passing in its current form, the phrase "snowball in hell" comes to mind. But it is a pretty telling statement. As soon as the Democrats finally got control over the tax system, Ron Wyden picked that time to get all friendly with the Republicans and cut corporate taxes by 31%.