Tax Simplification or Oversimplification?

On 23rd February 2009, a new Tax legislation was drafted by U.S. Senators Ron Wyden (D‐Ore.) and Judd Gregg (R‐N.H.). If you want you can read more about it here. Even though it is called The Bipartisan Tax Fairness and Simplification Act of 2010, it is not really fair and oversimplified at best.

Let’s summarize a bit as to what’s in it for you.

- Tax brackets will be reduced from 6 to 3. 15%, 25%, and 35%.
- Elimination of Alternative Minimum Tax.
- One page 1040 form (example)
- Making Child Tax Credit, the Earned Income Tax Credit, and the Dependent Care Credit which are set to expire this year permanent.
- Elimination of phase-out for itemized deductions and personal exemptions.
- One flat corporate tax rate, 24%.
- Allowing small businesses to expense equipment instead of depreciating it.

Now take a breath, let’s dissect some of what you read above.

Tax Brackets

As there will be only 3 tax brackets, things will be simple? According to the plan, middle class will benefit by these 3 tax brackets because if a couple makes up to $200,000 their maximum tax rate will be 25%. The rate right now for the same category of people is between 25%-28%. That is really not a change and in fact it expands the definition of rich.

One Page 1040

You’ve got to love that. I mean, ONE PAGE 1040! That means your taxes will be less complicated than filing for FAFSA? I am all for that. Here is the catch, the numbers will be printed on the one page 1040 and will be sent to you at your mailing address. IRS has all the W-2 information, your interest income, your retirement contributions and distributions, unemployment data, and taxable refund information. All they have to do is print it and send it to you so that you sign and mail it back. How’s that for oversimplifying taxes?

Corporate tax rate of 24%

I am sorry that I was born a human. I am taxed at maximum of 35% and the entities that are created by ink happen to be in a more favorable position. I feel sorry for myself. 24% tax bracket is being pushed because of increasing outsourcing of local American companies because of high taxes. American has the best business structure and environment in the world and if local companies are leaving, there are number of foreign companies that are coming here. Being competitive is all good but that doesn’t mean that an entity that exists merely on paper should be given a more favorable tax rate than people who work to make these entities successful.

Further reading:

The Tax Lawyer’s Blog: Tax Fairness Bill Update: Wyden and Gregg on Morning Joe
Tax Update Blog: Bipartisan Tax Reform?

What do you think? Thumbs up or thumbs down?