Let’s Not Wait Another 20 Years to Fix the Tax Code
Middle Class America Needs a Tax Cut and Deserves a Simpler Tax Code
By U.S. Sen. Ron Wyden

The evenings and weekends of millions of Americans leading up to April 17 were consumed by one thing they shouldn't have to wrestle with—their income taxes. This struggle unfortunately has become too common as folks across America try to understand a tax code that is written like a foreign language.

For millions of families, this year’s taxes will be far more painful than a lost receipt or an uncertain deduction. These folks will literally have to do their taxes twice, all because of the Alternative Minimum Tax (AMT).

The AMT was designed by Congress to ensure the absolute wealthiest taxpayers didn’t avoid paying any federal taxes through aggressive use of tax breaks and loopholes. Unfortunately, Congress failed to index the AMT for inflation (a problem that is shared by the estate tax). Today, the AMT has become a spider's web that is unfairly trapping more and more families every year.

In 2003, 29,000 Oregon taxpayers had to file AMT returns, and these numbers will explode in Oregon for 2004 through 2006. Nationally, 3.6 million taxpayers were impacted by the AMT in 2005, with the number expected to rise to more than 19 million in 2006 unless Congress acts this year. Couples who together earn more than $63,000, have three kids and the most standard of deductions are getting it the worst and are at this very minute making hard choices about how to pay for massive, unexpected tax bills.

Adding insult to injury, the forms that taxpayers must use to determine if they have to pay the AMT require a skilled translator or a Ph.D. in economics, both of which are in short supply.

It doesn’t make any sense. And it doesn’t have to be this way.

Americans deserve an easier-to-understand and simpler tax code. That’s why I have introduced “The Fair Flat Tax Act.” My legislation includes a number of reforms to simplify the tax code, including repeal of the AMT. That means no more subtracting amounts from Form 8914 to determine what to put down on Form 6251. Under my proposal, those forms won’t be needed. Instead, taxpayers can file a new, simplified 1040 form that is one page and just 30 lines, for every individual taxpayer. This 1040 doesn't require taxpayers to understand pages and pages of confusing forms or labyrinthine tax tables.

Under my plan, everyone’s taxes will become easier to do. In a recent profile on this proposal in Money magazine, the reporter found that it took him only 15 minutes to fill out his tax form. To see for yourself, check out the one-page, sample tax form on my website at www.wyden.senate.gov.

What does “flat” mean? First, instead of the labyrinth of rates they currently face, all businesses would pay one flat federal tax rate of 35 percent. For individuals, instead of six tax brackets, my plan has three simple tax brackets—15, 25 and 35 percent. According to the independent, non- partisan Congressional Research Service, this proposal would result in an average tax cut of $683 for the 92 percent of American families who earn up to $150,000 and file joint returns— without adding a penny to the deficit. Incidentally, these are the same individual brackets that President Ronald Reagan proposed in 1986.

There are a few other commonalities between my proposal and Reagan’s tax reform effort, namely closing loopholes and setting a fair tax rate on capital gains and dividend income.

Since 1986, we have seen more than 14,000 amendments to the tax code orchestrated by legions of tax lobbyists; that’s nearly three every workday from then to now. Just as the 1986 effort did, my proposal also cleanses the tax code of many of these tax loopholes that serve more as a full- employment package for lobbyists and accountants than as good economic policy.

And also echoing the Reagan effort, my proposal treats income from work and wealth equally. The bottom line is that it’s time for the tax code not to just be simpler, but also to be fairer. America can do better than a two-tier system which forces a policeman to pay a far higher effective tax rate than an investor who makes the bulk of his income on capital gains and dividends.

It’s time that all taxpayers are treated the same.

Let me be clear: I am not interested in soaking investors. I am a Democrat who believes in markets and creating wealth, and I’ve taken some tough votes to prove it. Our country is all about equality, and our tax code should treat everyone’s income more equally too. And yes, I’ve heard the old saw about double taxation, and this is why it’s fiction: Many capital gains are never taxed at all because the property is transferred using tax-free transactions. And the taxes on dividend income apply to a different group of taxpayers from those paying corporate income taxes, so each taxpayer is only taxed once on the income.

Our current tax code is needlessly complicated, out of date, and doesn’t reflect the values of equality and fairness that are our nation’s hallmark. I hope you will join me in the effort to simplify the tax code and make it, if not something everyone likes, at least something everyone believes to be fair.

BrainstormNW - July 2006

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