Tax reform is a hot topic in Washington these days. And everyone, it seems, has a twist.
Count among those Senator Mike Lee (R-UT), who outlined his tax reform plan yesterday at the American Enterprise Institute. In his speech, entitled “Tax Reform, the Family, and the Pursuit of Happiness,” Senator Lee announced plans to introduce The “Family Fairness and Opportunity Tax Reform Act” which is “based on the traditional conservative tax reform principles of simplicity, efficiency, and fairness.”
Senator Lee characterized his ideas as “more pro-growth, pro-opportunity, and pro-family” than our current system. I’m all of those things. So I was happy to keep reading.
Under Senator Lee’s plan, there would be just two individual income tax rates: 15% on all income up to $87,850 for single taxpayers ($175,700 for married taxpayers) and 35% on income above those thresholds. Definitely more simple. From a tax policy standpoint, it’s interesting because those brackets – not taking into account other tax preference items – would broaden the base at the bottom, drop rates at the lower middle, raise rates at the upper-middle and lower rates at the top. You can compare those numbers to the 2013 rates here.
But then he also said, about the current system that there is a problem and:
That problem is what I call the Parent Tax Penalty.
My eyebrows went up a bit. He continued:
Under the current system, parents receive no additional benefits for having contributed or sacrificed hundreds of thousands of additional dollars raising their kids.
This is the inequity my bill is designed to highlight and address.
To do this, Senator Lee would eliminate most existing deductions and credits – wait for it – not related to children. He would replace those with a $2,000 personal credit to replace the personal exemption and standard deduction; a new charitable deduction; and a new mortgage interest deduction.
The credit to replace the personal exemption and standard deduction does achieve his goal of a more simple system, although it would, in theory, disadvantage seniors and the blind who currently qualify for an additional standard deduction. Without a standard deduction, I’m assuming there would be no additional standard deduction; therefore, those folks would be on the same footing as everybody else. That achieves the parity Senator Lee seems to want – but keep reading.
He would make the charitable deduction available to all taxpayers without itemizing. That’s both more simple and fair than the current system. Similar ideas have been favored by many taxpayers since, statistically, more taxpayers at the bottom donate a larger percentage of their income (as opposed to total dollars) than those in the upper brackets but those taxpayers have not been able to take advantage of the deduction since they don’t itemize.
Revamping the current mortgage interest deduction is likewise something that’s been talked about a great deal but hasn’t ever gotten much steam. Realistically, the mortgage interest deduction is a gimme to the real estate industry: it’s one of two personal interest expenses still allowed under the Tax Code (the other being the student interest deduction). From a tax policy standpoint, it should be scrapped: the loss of tax revenue attributable to the deduction was approximately $72.1 billion in 2006; $89 billion in 2008 and is expected to be $93 billion this year. Yes, all billion with a b. What Senator Lee’s proposal would do is eliminate the need to itemize in order to claim the deduction while keeping the cap quite low at just $300,000. This would likely benefit the middle class the most but would be a blow for those at the top. Currently, you can deduct interest on home acquisition debt of up to $1 million, including primary and second homes. Since statistically, taxpayers in the higher tax brackets take the most advantage of this deduction, lowering the cap would not only reduce the tax benefit available to those at the top but, the real estate industry would argue, diminish the incentive to borrow more money to buy houses (we’re supposed to think that’s a bad thing).
Also on the chopping block? The plan would eliminate the Alternative Minimum Tax (AMT), as well as the 3.8% Medicare surtax on investment income, and the 0.9% surtax on wages for high-income taxpayers.
All of these items might be controversial but they aren’t necessarily brand new. What is novel is Senator Lee’s focus on children as “the centerpiece of the plan.” He proposes an additional $2,500 per child tax credit (on top of the existing child tax credit worth $1,000) for “all parents of younger children.” Senator Lee didn’t offer details on who would qualify but I assume it would be largely the same as those under the existing child tax credit with an important distinction: it would not be subject to phaseouts. Additionally, he indicated that the credit would apply to income tax and to payroll taxes on the employer and employee sides. I can’t think of any other tax preference item of that size (outside of the itemized deduction) available to an average taxpayer family in the current Tax Code. Remember that credits are a dollar for dollar reduction in your tax bill so, for example, if you had three children and were in a 15% bracket, the additional credit would be the equivalent of a $50,000 deduction ($50,000 x 15% = $7,500). That’s huge.
And it gets even bigger.
Senator Lee would keep “existing child tax provisions.” I am assuming that he is referring to tax provisions such as the Earned Income Tax Credit (EITC) and the Child & Dependent Care Credit. It would be a bit incongruous for a conservative to champion keeping the EITC, largely considered a form of taxpayer welfare, but it’s clear that Senator Lee is reading from his own script here and not from a page in the Conservative Senator Handbook. And he wants it clear that he’s stepping outside of the norm: in his speech, Senator Lee took pains to define himself not as a conservative but as a “conservative with a libertarian streak.”
The result of the proposal is supposed to be to “level the playing field to treat all taxpayers more equally” and “restore opportunities to working parents and their children to pursue happiness that right now federal policy unfairly denies them.”
The parent in me wants to love this.
But the tax professional in me wants to scream.
This is entirely the problem with the Tax Code and our alleged efforts to reform it. We can’t keep replacing one set of tax preference items with another: that’s not simplification.
Like me, Senator Lee has three children. And like me, Senator Lee understands how expensive it is to raise those three children. Today, I had to make an orthodontist appointment; confirm an optometry appointment; and do a desperate search for a new raincoat. Tonight, it’s off to soccer practice and then dinner, where my children will attempt to eat me out of house and home. Having kids is expensive. But they are also a choice. I love my kids. But I chose them. I chose to get married. I chose to have not one, not two, but three children.
And as much as I think they are the most awesome kids in the world (sorry, Suri Cruise), I don’t think that it is the collective responsibility of our country to help me raise them. I do believe in certain kid-centric principals, like the right to a quality education, because I believe that it makes our society better. But I don’t know that I should get an additional tax break for having kids while those that choose not to have kids do not get the same benefit.
We shouldn’t try to fix a perceived “parent tax” any more than we should focus on remedying, in any given era, the “marriage penalty.” It shouldn’t be government’s place to create tax incentives to reward social behaviors. And really, what could be more “conservative with a libertarian twist” than keeping government out of your decision making?
I also fear that a system that rewards having children is ripe for abuse. I can’t help but think back to the 2008 stimulus package fiasco: the size of your rebate check increased by each qualifying child – and there was no cap. The numbers of folks who suddenly remembered they had children appeared to skyrocket; “taxpayers” were coming out of the woodwork to file returns simply to get additional money. That’s not the way our system is supposed to work.
I applaud Senator Lee for his proposal. I think it’s a bold move to introduce a plan with a key component that’s completely different from everything else out there. I love that he is thinking out of the box. I am encouraged that he wants to move towards a more simple plan. And, as a parent, I love the pro-family focus. I just don’t think that the mechanics make good tax sense.
That said, realistically, this plan won’t make it through Congress intact. Seniors aren’t going to champion this plan. Childless taxpayers aren’t going to champion this plan. High-income taxpayers aren’t going to champion this plan. And those staring down huge mortgages aren’t going to champion this plan. Something will have to give.
The bottom line is that, although we talk a big game, nobody wants to give up their individual tax breaks. I’ve said it before: we say we want a simpler tax system but what we really want is to pay fewer taxes.