Remember the Hall-Rabushka "Flat" Tax that was touted as a great simplification over the current tax scheme? That tax moved most of the burden of taxation to wage-earners, letting capital go largely untaxed.
Senator Ron Wyden (Oregon) and Congressman Rahm Emanuel (Illinois) have proposed a new take on simplifying the tax system. In the February 17, 2006 Wall Street Journal, they suggest a "Simple Tax, Fair Tax." Their version of the fair flat tax would have three personal tax rate brackets--15%, 25%, and 35%--instead of the current six brackets. It would also eliminate the unfair discrimination between ordinary wage income and income from capital. They describe this as follows.
"Under the current system, a police officer walking the beat pays a higher effective tax rate than someone who makes their money from capital gains and dividends. the policeman who makes $70,000 in annual wages pays almost 25% of that salary to the federal government, while an executive who makes five times that in capital gains pays just 15%. Today's tax code has not just become anti-middle class, but anti-worker. Wealth and work should be treated equally." Id.
Their solution is a good one. It makes sense to eliminate the category distinction between capital income and ordinary income. America has always believed that people should be treated the same whether they come from a rich family with several Mercedes in the garage or a poor working-class family that takes the bus to work each day. Eliminating the category distinction between capital income and ordinary income would also greatly simplify the Code and reduce the opportunities for wealthy taxpayers to manipulate their income.
One further change could help this proposal ensure that wealthy taxpayers pay their fair share of taxes upfront just like ordinary American wage-earners. Congress should require information reporting for all capital gains realization events, just as is currently required for salaries, interest, and dividends.
Eliminating the unfair discrimination against wage income in favor of investment income and ensuring that investment income gets reported to the IRS would go a long way towards simplifying the tax system and making it a fairer tax system. As Wyden and Emanuel note, the "aim is not to soak the rich but to make the tax system fairer [so that e]very American has a right to build and grow wealth."
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