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Income tax simplification yields multiple benefits

A politician discovered God’s phone number. He dialed and was told that he could ask one question only.

“God,” he said, “in my lifetime would I be able to file the tax return on the back of a postcard?”

The answer from God was: “Not even in my lifetime.”

This cynical joke derives from ample evidence that there is no such thing as a collective political epiphany. The reality of politics is that a politician worth his salt would commit to vote for a postcard-tax return only if a loophole that is dear to his constituents is not threatened.

Consider the complexity of the individual tax return: When filing their tax return, individuals are allowed an “itemized deduction” which reduces their “federal taxable income” by taxes paid to state and local governments, mortgage interest payments (also on second dwelling,) medical expenses (exceeding a certain fraction of income) and some other less substantial items.

With the passage of time, having noticed that the itemized deduction allows a few with high incomes to pay less than their “fair share,” in 1969 politicians invented the “alternative minimum tax” (AMT) that required adjustment to the taxable income disallowing most of the itemized deductions.

Democrats raised the AMT tax rate in 1993 as part of President Bill Clinton’s tax increase of 1993. Presently, if you elect to itemize, you must calculate both your regular tax bill and your AMT, and you owe the IRS the higher of the two.

If that is not complex enough, wait just a minute: Because low-income taxpayers have small AMT adjustments, an AMT exemption was introduced into the tax code that basically absolves them from AMT calculations.

It will take a mile-long postcard to file tax returns with the AMT complexity. In addition to paying dearly for preparing a convoluted tax return, a citizen must find it challenging to form a political opinion about fiscal-policy issues.

The only way to simplify the individual tax code is to abolish both the itemized deductions and AMT, and retain the top rates for taxes on income, capital gains and dividends at 35, 15 and 15 percent, respectively. These tax rates resulted from President George W. Bush’s tax cuts in 2001 and 2003.

I favor this rate blend because it is pro investment and therefore pro growth.

In January 2013, President Barack Obama signed into law the Taxpayer Relief Act which makes permanent the Bush tax cuts only for individuals earning less than $400,000 and couples less than $450,000. The war against “millionaires and billionaires” goes on.

Let us adopt the three top marginal tax rates as written in the tax code before Obama’s revision. Also, let us keep the provision of indexing the tax brackets for inflation.

The corporate income tax should be rescinded for the following three reasons:

First, it gives rise to double taxation. If this year $1,000 is your share in the corporate annual profit, at a corporate income tax rate of 35 percent you pay upfront $350, and on top of that you pay $97.5 – 15 percent of your dividend.

Second, assuming a zero corporate income-tax rate you would prefer to incorporate. Facing a corporate income tax, you would opt to invest in an unincorporated firm, say, a private proprietorship. This unfulfilled preference must lead to economic inefficiencies.

Third, The U.S. statutory federal corporate income-tax rate is the highest in the developed world. Many American corporations use a complex legal transaction known as “inversion” to avoid paying the exorbitant U.S. corporate income-tax rate.

Basically, inversion enables corporations to legally locate in foreign counters and pay lower corporate income-tax rates. Lowering our statutory corporate tax from 35 percent to 15 percent, or eliminating it altogether, would repatriate most of our corporations abroad, and consequently give a huge boost to production and employment at home.

Also it would restore the national debt to its pre-Obama level.