The U.S. tax code is a complex and burdensome maze of rates, exemptions, exclusions, credits, deductions, phase-out levels, and exceptions. People may not agree on anything else, but the nature of the tax code is certainly something that anyone of any political persuasion would agree on.
But with the expiration of the so-called Bush tax cuts looming on the horizon, the usual cries for reforming the tax code have been temporarily muted while attention is focused on renewing or extending the tax cuts; that is, keeping taxes from increasing on January 1, 2013.
If the Bush tax cuts are not extended, the current six tax brackets of 10, 15, 25, 28, 33, and 35 percent will decrease to five, with the rates increasing to 15, 28, 31, 36, and 39.6 percent, the child tax credit will decrease from $1,000 to $500, the maximum long-term capital gains rate will increase from 15 to 20 percent, qualified dividend income will be taxed as ordinary income rather than at the lower long-term capital gains rate, the section 179 expense deduction will decrease from a maximum of $250,000 to only $25,000, and the estate tax will increase with a vengeance.
But maintaining the status quo just averts a tax increase; it still leaves us with all the problems of the tax code.
The usual tax-reform idea, and the one that has been around the longest in a variety of incarnations, is the flat tax. Under a flat tax, there are no tax brackets and few or no tax deductions. The late economist Milton Friedman first proposed a flat tax back in 1962 when the highest marginal tax rate was 91 percent. The idea was resurrected in the 1980s by Hoover Institution economists Robert Hall and Alvin Rabushka, pushed by House Majority Leader Dick Armey in the 1990s, and then in the 2000s by former Republican presidential candidate Steve Forbes.
The Heritage Foundation, a conservative think tank, thinks it has an improvement over traditional flat tax plans.
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