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Sunday, October 30, 2005

On the Tax Reform Proposals

The President's tax reform committee has come out with a collection of fairly small-bore ideas for tax reform, with the main objective being to get rid of the Alternative Minimum Tax. This article is a fairly good analysis of the tax proposals.

The three main proposals include:

o Changing the mortgage interest deduction from a Schedule A deduction on interest for a mortgage of up to 1,000,000 to a tax credit of 15% on the interest for the max FHA conforming mortgage, typically between $300K and $350K. While getting rid of some of the energy pumping the real-estate bubble may be a good idea, this will pop it and is likely a political nonstarter.

o Eliminating the deductibility of state income and property taxes from Schedule A. This, along with the mortgage interest change, would basically fry anyone living in a state with a state income tax who bought a house - or a condo - recently, particularly in high-cost "blue states" that Republican Presidential candidates may someday want to carry.

o Getting rid of the employer's tax deduction for employee medical insurance for amounts beyond $5K for individuals or $12K for families. Presumably, this is meant to be a sort of tough-love to get employers to force down medical insurance costs, or to pressure them to offer high-deductible insurance that can be used with a Health Savings Account. But, in an age of fear over medical costs, this would also appear a political nonstarter.

The main weakness of the above is that they are all politically tough, but are definitely smallthink tinkering. If you are going to do the political heavy-lifting to reform the tax code, why not swing for the fences? There are lots of interesting ideas, such as a consumption tax, a flat tax, or a national sales tax. (Personally, I like a flat income tax, with a big front-end deduction). All have strengths and weaknesses, but they are big-deal enough to generate excitement and advocates, as opposed to simply being annoying and politically dead.

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