Targeted tax measures rather than across the board cuts

A tax system most likely to meet principles of good tax policy has a broad base (few, if any, deductions) and low rates. Our current federal income tax violates this approach and the number of special deductions and credits, and the corresponding complexity and lack of transparency continues to grow.

If all of part of the "Bush tax cuts" are extended, we continue to leave the tax system complex and inequitable. The large dollars involved in any extension, could instead be used to reduce the deductions and credits and lower the rates. If there is continued belief that economic stimulus is needed, it should be targeted rather than provided in a shotgun approach as would be the case if all of the cuts were extended for one more year. As William Gale notes in an op ed in today's Washington Post - "Five Myths About the Bush Tax Cuts" (7/31/10) - "most Bush tax cut dollars go to higher-income households, and these top earners don't spend as much of their income as lower earners" (see his Myth #1). Gale suggests that the dollars would help the economy more if used for aid to states, unemployment benefits and credits to help job creation.

I think Congress should seriously consider:

1. Letting all of the tax cuts expire as originally planned.
2. Enacting some simplifications such as repealing the itemized deduction and personal exemption phase-outs which really just mask a higher rate on higher income individuals. The higher Medicare taxes that come into effect in 2013 already raise the tax rate for high income individuals.
3. Letting the 2009/2010 tax breaks enacted temporarily as part of the American Recovery and Reinvestment Act of 2009 expire as intended.
4. Following Dr. Gale's suggestion and target any stimulus dollars rather than give across the board cuts.
5. Using the dollars to repeal the AMT for individuals (rather than just patching it yearly).
6. Consider equity in the law. The data on 47% of individuals not having federal income tax liabilities is too high compared to how many individuals need tax relief. I've referred before to a letter to the editor in Tax Notes describing a hypothetical family of 5 with $100,000 of wage income that could easily have zero federal income tax liability! That is just wrong. (Note - I said federal income tax liabilities - most of these individuals do pay federal payroll taxes and a variety of other federal, state and local taxes. Also see the 4/13/10 New York Times article, "Yes, 47% of Households Owe No Taxes. Look Closer").
7. Set a schedule for hearings and public forums on how to improve the tax law - not by giving everyone all kinds of complicated tax breaks, but by broadening the base and lowering the rates. These hearings and forums also need to include discussions about what it will take to reduce the deficit and debt.

What do you think?