Tuesday, March 2, 2010

Wyden-Gregg Tax Reform Plan: Pseudo Reform?

Benjamin Franklin is reputed to have said that "The only things certain in life are death and taxes." A third is periodic proposals for tax reform, of which the latest is that of Senators Democrat Ron Wyden (Oregon) and outgoing Republican Judd Gregg (New Hampshire).

Its key features include replacing the current six tax brackets (10, 15, 25, 28, 33, 35 percent) with three (15, 25, and 35 percent), tripling the standard deductions while eliminating others, reducing the corporate tax rate to 24 percent and allowing small businesses to expense investment, among others.

Even were it to pass, for how long would the Wyden-Gregg reform endure? President Reagan’s second term signature achievement was the Tax Reform Act of 1986, which resulted in two rates, 15 and 28 percent, the fewest number in the history of the federal income tax. Reagan’s Republican successor, George H. W. Bush signed into law an additional 31 percent rate in 1990. President Clinton claimed credit for adding two more rates of 36 and 39.6 percent in 1993. Although President George H. Bush lowered rates across-the board, he did not reduce the number of rates or simplify the tax code.

History suggests that three rates lack stability and durability. Demagoging politicians will rush to propose additional higher rates on the "rich" within a few short years, while restoring former deductions or granting new ones.

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