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Tuesday, March 30, 2010

The Wyden-Gregg Bipartisan Tax Reform Bill: Why Congress Should Listen

Despite protestations that the wealthy benefited the most from the 2001 and 2003 tax cuts, those reductions lowered taxes for all taxpayers and sped up a decades-long trend of moving the tax burden to a declining proportion of upper-income taxpayers. In 2006, the latest year of available data, the top 1 percent of income earners paid more than 40 percent of all income taxes. The bottom 50 percent paid just 3 percent of all income taxes.

On the corporate side, Wyden-Gregg does even better. The bill turns the progressive corporate income tax into a 24 percent flat tax. This lower rate would greatly increase the competitiveness of American businesses and make the United States a more attractive place for new business investment. With a flat rate of 24 percent, the U.S. rate would be below the average 25 percent rate of other developed countries in the Organisation for Economic Co-operation and Development (OECD).

The treatment of retirement savings is one of the strongest points of the Wyden-Gregg bill. The bill expands tax-free savings by consolidating the various forms of IRAs into one Retirement Savings Account and offers a new Lifetime Savings Account. These adjustments will allow families to put away up to $14,000 a year for retirement in addition to what they can save through 401(k) plans. These new opportunities would help families save for retirement and increase the savings rate. Further reducing taxes on all savings, not just for retirement, would encourage even more saving and investing and promote economic growth.

First, it reduces the number of tax brackets and rates for individuals from six to three. It also makes the corporate income tax a 24 percent flat tax. Second, it drastically reduces the number of credits, deductions, and exemptions for families and businesses. Lastly, it completely abolishes the AMT. In addition to reducing complexity, the abolition of the AMT will also remove the threat that the AMT will raise taxes on middle-income families. The AMT is intended to affect only high earners, but the minimum income that designates families for the AMT is not indexed for inflation.

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