Wednesday, April 16, 2008

McCain’s Tax Reform—So Near And Yet So Far

On April 15, 2008, Republican presidential nominee John McCain fleshed out his tax proposals. Apart from some specific immediate measures that have been widely reported in the media, he called for a new and simpler tax system. At their choice, in place of the current Form 1040 and all the allowable deductions, individuals could file an optional one-page tax return that includes a doubled standard deduction and pay one or two rates depending on income. McCain did not specify either the rates or the level of income at which the two rates would apply.

We have been down the two-rate reform once before. President Reagan’s Tax Reform Act of 1986 consisted of two rates, 15 and 28 percent. It lasted until 1991, when his successor, the first President Bush, signed into law a bill that imposed a third rate of 31 percent. In 1993, President Clinton added two more rates, with the top rate at 39.6 percent. Two rates had a half life of less than three years.

So long as McCain was proposing an optional simpler system, he could have, indeed should have, proposed a real flat tax of one rate.