Commentary: Got A Surplus? Simplify Taxes

Just call me John Beresford Tipton Jr. If you don't recall, Mr. T. was The Millionaire of the popular 1950s TV drama--a reclusive philanthropist who stunned average Joes and Janes with gifts of $1 million. The black-and-white small screen has given way to the Internet. And there has been a lot of inflation since 1955. So I have a slightly grander assignment: Give away $1 trillion.

That's the size of the projected federal surplus over the coming decade. Of course, the trillion may never materialize. But since Congress seems hell-bent on turning it into a massive tax cut--including measures that will make the code as complex and illogical as ever--I've got an alternative.

How about using the money to shift to a simpler, more economically neutral tax scheme? Dump a bunch of special-interest breaks, but cut overall tax rates. And trim Social Security and Medicare levies, which at 15.3% of payroll are a huge burden on low- and moderate-income workers as well as small businesses. There are plenty of loopholes on the corporate side, too. But for now, let's just focus on individuals.

START CLEAN. Bills now working their way through congressional tax-writing committees would gradually cut rates--which can be a good idea if done right. But they would also add a host of new, targeted tax breaks--for education, child care, health care, investors, oil drillers, and heirs to huge estates. Instead of adding more junk to the code, how about getting rid of about $350 billion worth of special provisions by dumping all credits for individual taxpayers? Except one--the earned-income credit for the working poor.

Why start a huge tax cut with a tax hike? Because it makes the code simpler and fairer by funding a bigger gift to folks losing those credits.

Now for the fun part. Let's trim the 15% rate to 13%. That's as low as I can go on my limited budget--even a trillion dollars ain't what it used to be. And, while we're at it, knock two percentage points off the 28% and 31% brackets, too. At the same time, give everyone earning less than the annual Social Security payroll limit--currently $72,600--a credit equal to one percentage point of the 15.3% tax.

And one more thing: Raise the standard deduction--now $7,200 for married couples--by, say, a thousand bucks. That would not only cut taxes, it would simplify life for millions who could then take the standard write-off rather than having to itemize.

Today, a couple with $60,000 in wages and two kids pays $10,860 in federal taxes ($6,270 in income taxes and $4,590 in payroll levies --and their employer pays $4,590 more). My plan slashes that by nearly $1,600, to $9,294. For low-bracket taxpayers, that should more than make up for the loss of credits for education, child care, and the like. It would also help get them out from under the alternative minimum tax, which uses an add-on levy to penalize families who take advantage of those breaks. To be certain they don't get caught by the AMT, couples earning less than, say, $150,000 should be exempt.

EVERYONE WINS. What about wealthier taxpayers? They would also benefit from lower bottom rates--since they would pay less tax on their first $158,550 in taxable income. And I'd give them another sweetener: Over the past decade, in an effort to raise tax rates without admitting it, Congress has quietly cut the value of both the personal exemption and itemized deductions for high-income taxpayers. Let's ditch both gimmicks, which start to bite at about $124,000 and can equal nearly two percentage points of hidden tax for top-bracket payers.

What else? How about replacing the dozen or more tax-advantaged savings accounts, such as individual retirement accounts and 401(k)s, with a single plan with one set of contribution and withdrawal rules.

What do all of these ideas have in common, aside from a certain hubris on my part? They lower rates for everyone--especially the middle class. They give taxpayers more freedom to spend their tax dollars as they see fit, and they dramatically ease the agony of filing a tax return. It's a gift.

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