Hey, let's change the IRS tax rules?!?

[Melensdad]

Up for debate now, let's change the tax code. The mission is to make it easier to file your taxes. The proposed changes are suggested to be revenue neutral.


Here is the CNN article:

NEW YORK (CNN/Money) - The president's tax-reform advisory panel submitted two final proposals Tuesday morning to the Treasury Department, both of which offer significant changes to the tax breaks people have come to expect -- as well as to the complexity and costs of filing that many have come to detest.

The question of who wins and who loses is always huge when changes to the tax code are proposed. Speaking on Bloomberg TV Tuesday morning, panel chairman Connie Mack, a former senator from Florida, urged taxpayers to "look at the entire package and not pick one portion of it to determine if it's good for them."

In the aggregate, taxpayers should be paying the same amount as they do under the current system, but individuals may end up paying more in some areas and less in others. The panel's mission was not to reduce taxes, but rather to make the tax code simpler, fairer and more growth-oriented.

Upon receiving the panel's report at a press conference Tuesday morning, Treasury Secretary John Snow said, "These are bold recommendations. ... They will challenge orthodoxy on tax policy." He noted that they would be "a starting place for recommendations we'll make to the president," recommendations which could come by the end of the year.

If that's the case, it may be that President Bush includes some specific recommendations for tax reform in his State of the Union address early next year. But most observers, noting just how controversial all tax proposals are -- and noting the fire some of the panel's proposals have come under already -- don't expect anything to pass Congress in the near future.

Here are some of the key changes the panel is proposing that are common to both of their proposals:

Eliminate the alternative minimum tax The AMT is a parallel tax system originally intended to ensure the wealthy pay their fair share of taxes by eliminating many of the deductions and credits they get under the regular income tax system.

But because the income-exemption levels have never been indexed to inflation, by 2010 the AMT threatens to catch more than 30 million taxpayers, mostly from middle-income households. The estimated cost of repealing the AMT is $1.3 trillion over 10 years.

The panel was instructed to come up with proposals that are revenue-neutral, meaning they would have to produce the same revenue as expected under the current system. As a result, the panel had to take a hard look at the tax breaks offered under the current system to see where they could make up for that lost revenue, while at the same time ensuring a new tax code was fairer and more growth oriented than the current one.

(For more on their mandate to make their proposals revenue-neutral, click here.)

Reduce investment taxes In the panel's proposal to simplify the current income tax, dividends from domestic earnings would be tax-free as would 75 percent of the capital gains you receive. The other 25 percent of gains would be subject to your marginal (or top) tax rate.

The net effect is that your capital gains would be taxed at rates between 3.75 percent for those in the lowest tax bracket to 8.25 percent for those in the highest tax bracket. (For example, if you're in the 33 percent tax bracket and receive $100 in capital gains, $75 would be tax-free and $25 would be taxed at 33 percent, or $8.25. The net tax you'd pay on the full $100 is $8.25, or 8.25 percent.)

Under the existing code, dividends and long-term capital gains are taxed at 15 percent or less, but they are set to go higher after 2008.

Interest on everything except tax-exempt municipal bonds would continue to be taxed at individual rates as is the case in the existing tax code.

In the panel's second proposal, dividends, capital gains and interest would all be taxed at 15 percent.

Alter homeowners' tax breaks The panel recommended lowering the mortgage interest cap, which is the amount of a loan on which home owners would receive a tax break for interest paid, from $1 million to the average regional housing price in the range of $227,000 to $412,000.

The deduction would be converted to a credit equal to 15 percent of interest paid on mortgages up to the interest cap. A credit is a dollar-for-dollar reduction of the taxes you owe, while a deduction only reduces your taxable income by a percentage equal to your top tax rate. Deductions benefit high-income taxpayers the most and are limited to those taxpayers who itemize on the federal tax returns.

Generally speaking, the higher your mortgage loan and the higher your tax bracket, the more likely it is that you'll see less of a tax break than you would under the current system. That's because under the current system those in the highest tax brackets benefit most from the deduction

(See more on how changes could affect your tax bill.)

Reduce the marriage penalty All tax brackets, family credits and taxation of Social Security benefits for couples would be double those of individuals. Under the current system, some two-earner married couples filing jointly end up paying more in taxes than two single taxpayers with the same income because of the way various deductions, credits and tax brackets are structured.

Reduce tax breaks on employer-provided health insurance When you work for a company, your employer typically foots a large portion of your health-insurance premiums. That money, which is not reported on your W2, is tax-free to you.

The panel recommended capping the amount of tax-free money that may be used to pay for health insurance to $5,000 for single coverage or $11,500 for family coverage.

Repeal the federal deduction of the state and local tax deductions Under the proposals, taxpayers would no longer be allowed to deduct the state and local taxes they pay on wage income, investment income and property.

Former Senator John Breaux of Louisiana, who is the panel's vice chair, on CNBC Tuesday morning explained part of the panel's reasoning this way: "If people in California want to pay extra taxes to have their trash picked up, people in Texas shouldn't have to subsidize it."

Reduce the number of tax brackets Under the panel's first proposal, which is a streamlined version of the current income tax, the number of tax brackets would be reduced from 6 to 4. They would be: 15%, 25%, 30% and 33%.

Under their second proposal, which combines the income tax with a progressive consumption tax, there would be only three tax brackets: 15%, 25% and 30%.

Reduce and simplify tax-advantaged savings accounts You might be forgiven for not being able to keep straight the differences between several types of IRAs, various types of 401(k)s, to say nothing of HSAs, FSAs, Coverdells and 529s.

The tax-reform panel is proposing to consolidate defined-contribution plans -- e.g. 401(k)s, 403(b)s, 457s -- into one Save at Work Account with simple rules and an annual contribution limit of $10,000.

They also propose replacing all types of IRAs with one Save for Retirement Account that would be available to all taxpayers. You could contribute up to $10,000 a year with after-tax dollars that would grow tax-free. Currently, your income and your workplace savings options determine whether you're eligible to contribute to different types of IRAs and whether your contributions can be deductible or whether your earnings grow tax-free.

Education savings plans like 529s and health savings plans like flexible spending accounts (FSAs) would all be consolidated into one Save for Family Account. This account, which would be available to all taxpayers, could also be used for new home and retirement savings as well. You could contribute up to $10,000 a year with after-tax dollars that would grow tax-free.

Simplify tax filing The panel proposes creating a 1040 Simple form that could fit on both sides of a 4 X 6-inch index card. The number of lines would be reduced from 75 on the current form to 32 on the proposed form. It would also reduce the number of schedules, forms and worksheets from 52 to 10.

The panel also proposes creating two new credits: one for family, which would replace the standard deduction, the personal exemption, the child tax credit and the head of household filing status and tax bracket; and one for work, which would consolidate the earned income tax credit and refundable child tax credit.

​

 

[Melensdad]

OK, now for my view of all this stuff (not saying I am correct in my views, just saying what I see and how I understand it).


Eliminate AMT: Considering inflation and the lack of indexing, this is probably good for most people.

Reduce Investment Taxes: Good thing, will encourage saving, should eventually lead to more self sufficient people (but that will take decades).

Alter Homeowners Taxes: This seems like an idea to soak the wealthy, but really doesn't seem like a bad idea. I think many people buy more expensive homes than they can support, largely because of the tax break. It won't affect me at all, but it seems like individuals with high mortgages will scream, but if they have a high income & mortgage they better have a high income, and very few people will have pity on the folks this affects.

Reduce the marriage penalty: Thank goodnest someone has a brain! This is way overdue.

Reduce tax breaks for taxpayer paid health insurance: OUCH, this will cost a lot of folks money, it may end up leading to higher wage pressure on businesses to make up for the government's action, which is sort of a double smack. One smack to the individuals who get the benefit, another to the businesses that provide it.

Repeal Federal deduction of State & Local taxes: OUCH, again smack people and seems unfair.

Now in all fairness, this is supposed to be looked at in total, not line by line.

 

[Cityboy]

Why not eliminate all this nonsense and replace the entire system with a national sales tax? No income tax. No 1040 to file. No IRS. Sounds interesting. Check it out here:

http://www.fairtax.org/

 

[Melensdad]

OK FINE. Go ahead and ruin my thread by injecting logic into the tax code! I thought we were talking about the government's tax code, not fairness or logic!

 

[Dargo]

Why not eliminate all this nonsense and replace the entire system with a national sales tax? No income tax. No 1040 to file. No IRS. Sounds interesting. Check it out here:

http://www.fairtax.org/

This is frowned upon in a big way by the liberal side. They argue that by having a national sales tax, it would unfairly hit the low income. For the most part, families in this country earning $35k or less pay no federal income tax. They are, in fact, not tax paying Americans. Having a national sales tax would require those who now pay zero federal tax to begin paying some tax. Requiring these people to pay some sort of tax is met with the absolute strongest opposition. However, it is generally these people who call themselves "tax paying Americans". I know this to be a fact, because I've done many tax returns for friends and relatives over the years, and the ones who thump their chest and proclaim to be a "tax paying American", in fact are not. Having a "fair" tax will positively never fly here in the good ole U.S. of A.

 

[Cityboy]

Sorry. It always worries me every time they go monkeying with the tax code. They always seem to make it worse than it was before for somebody. Whatever happened to the concept spending less, thereby needing to confiscate less from our productive citizens?

Dang it. There goes that logic thing again.

 

[Cityboy]

This is frowned upon in a big way by the liberal side. They argue that by having a national sales tax, it would unfairly hit the low income. For the most part, families in this country earning $35k or less pay no federal income tax. They are, in fact, not tax paying Americans. Having a national sales tax would require those who now pay zero federal tax to begin paying some tax.

They still will not pay taxes under this system. The liberals argument is incorrect. There is a built in break for low income Americans. Check out the link, it dispels a lot of popular liberal myths about the NST.

 

[Melensdad]

I'll admit that I didn't go look at the link, but in the 'national sales tax' models that I have seen in the past, the low income people would have to get some sort of a refund for the tax they paid on their purchases.

That implies a couple things. First they have to wait to get their money back. Second they have to keep accurate records.

The liberal complaints that I have seen related to this concept is that people who can least afford to wait are made to wait . . . and record keeping in arduous for these people (as if to imply it is easy for middle & high income people???).

 

[Doc]

I have done no research on this subject.
The new plan that Bob laid out did not sound to bad (Little impact on me from what I saw).

I would support a national sales tax. Last it was brought up it was my understanding that the wealthy would never put up with this because they would not have the deductions they have now. Wouldn't they end up paying an unproportinal share if such a tax were put in place?

 

[Melensdad]

I would support a national sales tax. Last it was brought up it was my understanding that the wealthy would never put up with this because they would not have the deductions they have now. Wouldn't they end up paying an unproportinal share if such a tax were put in place?

I generally don't consider myself wealthy so I may be speaking out of turn, but in a national sales tax system, the wealthy would be taxed on what they buy just like the middle class. Now they would likely purchase more goods so they would logically pay more taxes than the middle class, however I'm not sure that there is any reason to believe that it would be unproportional. In theory you could control how much you pay in taxes by simply buying more or less.

The fact that they would lose their deductions is really not relavant because everyone would lose their deductions and the system would be based not on what was earned, saved, etc but rather on what the consumer spends.

At least that is how I understand it.

 

[DaveNay]

I generally don't consider myself wealthy so I may be speaking out of turn, but in a national sales tax system, the wealthy would be taxed on what they buy just like the middle class. Now they would likely purchase more goods so they would logically pay more taxes than the middle class, however I'm not sure that there is any reason to believe that it would be unproportional. In theory you could control how much you pay in taxes by simply buying more or less.

The fact that they would lose their deductions is really not relavant because everyone would lose their deductions and the system would be based not on what was earned, saved, etc but rather on what the consumer spends.

At least that is how I understand it.

I also did not actually read the link provided by Cityboy, but the times I have read about a national sales tax usually include the removal of taxes from "necessities" such as groceries. The idea being as Bob mentioned that the more income you have, the more you will spend on luxury items.

Of course, there will be the low income people who buy beyond their means, as well as the wealthy person who lives in a 1500 sq ft suburban house, but those are the choices we make in life.

 

[Doc]

I like that it sure encourages savings. That alone could wake some up, but the more that figure that out, the more Uncle Sam suffers. I suppose that is why it's unreralistic. We'll never see it happen.

 

[Melensdad]

I like that it sure encourages savings. That alone could wake some up, but the more that figure that out, the more Uncle Sam suffers. I suppose that is why it's unreralistic. We'll never see it happen.

I doubt a National Sales Tax would actually do much to encourage savings, but it might. There is no 'active reward' to save. It is simply a 'passive' savings as you would not pay tax on what you do not spend.

However, I think that removing some of the Tax Deduction from home ownership, as outlined in the initial proposal, would encourage people to save some money, especially since it would be combined with a proposal that would reduce taxes on investment income, capital gains, etc. That would provide an 'active reward' for specific activity; meaning you buy a slightly smaller home and you maximize your tax credit, while at the same time you put more in savings, which is then not taxed.

 

[OkeeDon]

The problem with a national sales tax is that it would discourage consumer spending, and without consumer spending our economy goes to hell in a hand basket. Savings are fine, but if everyone saved the economy would tumble.

 

[Melensdad]

The problem with a national sales tax is that it would discourage consumer spending, and without consumer spending our economy goes to hell in a hand basket. Savings are fine, but if everyone saved the economy would tumble.

I tend to disagree with this notion. The tax would be on pretty much everything (with the possible exception of food/drugs). Therefore everything you buy would simply be a bit more expensive. The $1.99 2-liter of Pepsi would be $2.19. The tires for you car would cost a couple bucks more. Are you telling me you will go without your Diet Pepsi or forgo putting fresh tires on your wife's car when the old ones wear out?

 

[frank_f15]

Mabey what would be a good idea, is to get all the corps that off shore to start paying taxes, that would solve a whole lot of problems, or mabey we could get UNCLE DICK TO convince his old buddies (haliburton )to stop ripping us off i don't care how u change the tax code, the little guy is going to take it in the shorts!!!! has been that way since forever, and will continue to be so. we fought the Revolutionary war to get away from Taxation without reprenstation, now we have taxation with Represeantaion and we are still paying up the yang , yang. i am neither left or right wing, just hate to get fornicated over all the time.

 

[OkeeDon]

I tend to disagree with this notion. The tax would be on pretty much everything (with the possible exception of food/drugs). Therefore everything you buy would simply be a bit more expensive. The $1.99 2-liter of Pepsi would be $2.19. The tires for you car would cost a couple bucks more. Are you telling me you will go without your Diet Pepsi or forgo putting fresh tires on your wife's car when the old ones wear out?

Well, first of all, while I haven't read the linked website, every proposal for a national sales tax that would raise enough money to fund the obligations of the feds is somewhere in the range of 16%-17% or greater; I've seen estimates up to 25%. If the borrow and spend guys stay in office much longer, it might have to be something like 50% in order to cover the interest payments, mostly to foreign governments, who use the income to subsidize their exports which are killing our economy.

Second, of course I would not forgo the Diet Pepsi or the new tires. But, I might think twice about the new Sprinter. I'm going to be paying around $5K state tax as it is; I sure wouldn't want to pay $12K more for federal sales tax; in fact, I couldn't affford it with that kind of a price tag; it would be a deal killer. It would also be more than I paid for income tax last year in just one purchase. That sounds pretty stupid, to me.

In other words, the discretionary spending would go down. Would people stop buying things? Of course not. But, they might spend 15% to 20% less to make up the tax, and that would put a real hurt on our economy.

Back in the stone age when I lived in Massachusetts, they had an excise tax on cars that was paid every year, based on blue book value. At that time, it was $66 per thousand. A new car, say a semi-luxury Oldsmobile, cost at least $6,000. So, the first year, in addition to the sales tax, the excise tax was $396 The next year, it was $330, and so forth.

The solution was obvious. We didn't buy new cars. In my case, I bought a wrecked '67 Volvo 122S station wagon, had a new quarter panel and such installed, had all new trim, door gaskets and such installed, did an all over paint job, installed Michelin X tires and Koni shocks, and had a first class car. I had some real bucks in it, but the blue book value was under a thousand, so my excise tax was tiny -- less than $66. A friend of mine bought a 1954 Oldsmobile Holiday 88 hardtop from a widow; it was a cream puff, perfect unrestored car, garage kept, almost no miles. He paid more than a fair price to get it, but the blue book was $100, and his excise tax was $6.60. Smart folks will do the same types of things if there is a national sales tax.

Such a tax would also drive inflation. Today, the income tax for most people is withheld before they even see it, so it doesn't hurt all that much. But, if the price for everything went up 15% tomorrow, that would be an impact everyone can feel and they would be demanding raises and such to cover it.

Once a national sales tax, or worse yet, a value-added tax, is established, the politicians will not be able to keep their hands off it. It will be incredibly easy to gradually edge the rate up just a little at at time.

Many states have income taxes that are more or less tied to the federal income tax. Do away with the federal income tax and substitute a federal sales tax, and the states will have to look hard at their tax collection methods. If they follow suit and eliminate their income taxes, then their state sales taxes will have to go up to cover the difference. Between state and federal sales taxes, you might end up paying more than 25% right from the beginning. I guarantee you that you will examine your discretionary spending.

There is a limit to what people will pay before they stop spending. The State of Pennsylvania once raised their alcohol taxes so high that people cut way back on buying booze. They bought as much of it, but it was either cheaper booze, or they smuggled more of it from New York or West Virginia.

It will increase fraud and lawlessness. Right now, there is not a businessman anywhere who has not been approached by a customer with a scheme to eliminate state sales taxes; those attempts will go up by several orders of magnitude if the tax was a lot higher.

Right now, we enjoy tax-free purchases on the internet in many casesm primarily because of the difficulty the states have in enforcing their use tax rules. If there was a federal sales tax, I guarantee that the free ride on the internet will be over instantly.

Bottom line, a national sales tax would be a disaster from many different perspectives. It sounds so simple, but as I keep pointing out, the simple solututions rarely work.

 

[Dargo]

As you may have guessed, I disagree. People would have more descresionary spending cash, so they would spend more. So spend more for now, be able to save without penalty for the future; what's the problem?!

Also, I like the idea of a flat tax. I have a real issue with a large segment of the population paying no tax at all. They have become part of the ever growing entitlement families. In the "real" world, if you don't pull your share of the load, you are fired. Here, you just sit at home, have more babies, and the government will not only give you free housing, but will pay you more money based on the amount of babies you are able to make. However, you cannot marry the father of these babies, that will reduce the income from the government. So, sit at home, make babies with lots of fathers, and collect even more money. Lest you think I jest, we are now beginning the 3rd generation of these type of families. They can vote. Do you think they will ever vote for something that is for the good of the country, or for their own personal good?! We all know that answer.

The entire concept of personal responsibility has competely eluded us now. When I grew up, if you got a girl pregnant, she became your wife. Period. Now, it is a potential inconvenience. It is not a life changing thing to happen. The government will pay for all the medical bills, for the delivery of the child, for the medical care of the mother, for the medicine and formula needed, for the baby supplies, and for the room and board. Plus to boot, the mother gets a raise in the welfare check. Does nobody else see what we have done? Jesse Jackass ought to be out beating his chest to drive his people to stop being dependent on the hand outs from the government. He should put the shame back into that position, rather than just look at it as a career choice! But, no, the biggest biggot in today's media would never do such a thing. He simply says that the welfare checks should be larger, and that the single mother shouldn't ever have to worry about that check not keeping up with the cost of living.

Ah, I say if the people don't want a national sales tax, then "poof" there is now a flat 15% income tax on everyone. I'm not buying that such a system would not be fair. The people I see opposing such a tax can afford nice cars, they can afford, beer, booze, cigarettes, full service cable service, and they can afford to eat out 5 nights a week. Don't even try to tell me that they can't afford to simply pull their own weight. Afterall, if they make so much less, that 15% won't amount to but a pack of cigarettes or two. They may have to drink Busch rather than Budweiser sometimes though.

And property taxes!!!! Let's talk about how frickin fair that is! I get to pay a huge property tax bill to allow the "at risk" students (not in my school zone) have full day kindergarten. I'm paying all the frickin high taxes for this program, and my little J. B. only gets half day, and I have to pay extra for that!! My SIL pays squat for property tax and her kid gets full day, plus free breakfast, lunch, and after school programs. Sorry, but this system is broken.

 

[Cityboy]

Well, first of all, while I haven't read the linked website....................Bottom line, a national sales tax would be a disaster from many different perspectives. It sounds so simple, but as I keep pointing out, the simple solututions rarely work.

Why not read the web site and buy the book, get all the facts and then we could actually discuss the issue in a logical fashion? I'm not picking on Don here either (As much as I enjoy that). So far nobody has said they have read the link or the actual proposed NST bill. Most, if not all objections raised here are addressed on the web site. I'm planning on picking the book up this weekend to educate myself further.

Why let the shills on either side convince us of whether this is good or bad? You are only going to get blurbs from one side or another from the news media or from op-ed dissertations.

The more I learn, the more I like it. One thing that is interesting to me is that there is support and opposition from both Democrats and Republicans. One close to home example is my wifes super conservative cousin who is vehemetly and vocally opposed to it. He is a CPA who has earned considerable wealth working within our current complicated tax code. He visualizes his very high income stream dissapearing with a NST and has come up with every concievable reason it will not work.

For me, elimination of the IRS and the income tax alone make me want to study it and consider it more. Add in the fact that you will take home 100% of what you earn each payday to decide for yourself how you will spend it and it gets even more attractive. I'm still learning, so I'm not prepared to argue that this is the best tax proposal in my lifetime yet, but the deeper I dig, the better I like it. Why not keep an open mind until we have all the facts?

 

[Melensdad]

In other words, the discretionary spending would go down. Would people stop buying things? Of course not. But, they might spend 15% to 20% less to make up the tax, and that would put a real hurt on our economy.

The problem with this logic is that they would NOT be paying 15% to 25% on their income, which is actually greater than paying 15% to 20% on their purchases. So in fact, they would have the money to pay the tax, they would simply pay the tax at a different time. Currently people get a paycheck every week or two, it comes with taxes taken out of it. Under the new system you would get a larger weekly paycheck because no taxes would come out of it. When you bought goods, then you would pay the tax wiht the added income you have received.

. . . then later wrote . . .when I lived in Massachusetts, they had an excise tax on cars that was paid every year, based on blue book value. At that time, it was $66 per thousand. A new car, say a semi-luxury Oldsmobile, cost at least $6,000. So, the first year, in addition to the sales tax, the excise tax was $396 The next year, it was $330 . . . The solution was obvious. We didn't buy new cars. . .then later wrote . . . Smart folks will do the same types of things if there is a national sales tax.

Don, I tend to agree with some individual points but taken as a whole program things look different than isolated taxes. Indiana had a very similar excise tax on cars, people didn't stop buying new cars. Some did keep their cars longer, it did pay to fix up their cars, but overall things balanced out over time.

. . . then later wrote . . .There is a limit to what people will pay before they stop spending. The State of Pennsylvania once raised their alcohol taxes so high that people cut way back on buying booze. They bought as much of it, but it was either cheaper booze, or they smuggled more of it from New York or West Virginia. . .

Don, remember I am the guy who actually is called to testify against these types of taxes before various legislatures. I totally agree that states can use taxes to modify human behavior. That is not part of this tax proposal. However if this tax proposal is applied, the same % of tax would be applied to all taxable goods, therefore making points like this moot on the federal level and still valid on the state level.

then later wrote. . . It will increase fraud and lawlessness. Right now, there is not a businessman anywhere who has not been approached by a customer with a scheme to eliminate state sales taxes; those attempts will go up by several orders of magnitude if the tax was a lot higher.

I totally agree. However we have a multi-billion dollar underground economy now that is based on the current tax laws. That underground economy will simply morph and alter to the new system. It would likely be harder to evade a national sales tax system.

Right now, we enjoy tax-free purchases on the internet in many casesm primarily because of the difficulty the states have in enforcing their use tax rules. If there was a federal sales tax, I guarantee that the free ride on the internet will be over instantly.

Don, you just described tax evasion on the state level. It is currently illegal. It is likely that the internet tax issues would continue at state level but it would be very simple to install a national sales tax on internet sales.

Bottom line, a national sales tax would be a disaster from many different perspectives. It sounds so simple, but as I keep pointing out, the simple solututions rarely work.

As outlined above, I tend to disagree with your first sentence, but totally agree with your last. I don't see a national sales tax triggering inflation or a collapse in our economy because I don't see it dramatically altering spending for the majority of the US. As there are typically stop-gap measures for lower income (and I would guess that would include retired people on fixed incomes even if they had personal savings of $1,000,000 or more) so that they were exempt from taxes (via a refund system) I think that it actually is workable. Not saying I would like the transition, just saying I think it is workable.

 

[Doc]

Back to your original post Bob:

Alter homeowners' tax breaks The panel recommended lowering the mortgage interest cap, which is the amount of a loan on which home owners would receive a tax break for interest paid, from $1 million to the average regional housing price in the range of $227,000 to $412,000.

The deduction would be converted to a credit equal to 15 percent of interest paid on mortgages up to the interest cap. A credit is a dollar-for-dollar reduction of the taxes you owe, while a deduction only reduces your taxable income by a percentage equal to your top tax rate. Deductions benefit high-income taxpayers the most and are limited to those taxpayers who itemize on the federal tax returns.

This part of the proposed new tax plan is scary to me. From this part alone I would see my taxes going up, quite a bit I'm afraid.
My memory is questionable, but way back when Reagan came out with a new tax plan to simplify things it sounded fine to me. Thought I might save a few bucks. It sure did not work out that way. I payed more. Like CB mentioned earlier in this thread, it's scary anytime they mess with the current tax structure. What they predict or say is not always what the real outcome turns out to be.

 

[OkeeDon]

Well, we just have a different "feel" for the proposal. Yours is more analytical. Because people have more money in their possession because they didn't have it taken out of their paycheck, you think they'd be willing to spend it on a sales tax. I disagree. I think once people have the money in their pocket, they will be reluctant to spend it on a tax. As CityBoy says, you're giving them 100% control over how much tax they pay, and in my opinion, that means they will spend less, because that's how they control what tax they pay.

They will choose less expensive items, do without some things, be more creative in how they acquire things. Yes, they jump through all kinds of hoops now in order to avoid taxes. I certainly do, and I do an excellent job of taking advantage of legal loopholes to lower my taxes. The difference is, with the tax money I save, I actually spend it because it doesn't involve paying any extra taxes. If you put a national sales tax in place, I will NOT spend as much. That will be my basic tax avoidance plan. As I mentioned, I would not pay more in a sales tax to buy my RV than I now pay in federal taxes; that's just stupid.

Of course, some people will go on spending; maybe the majority will. Most people will not be as anal as I am to figure out where every penny is going. My point is that enough people will lower their spending by enough of a rate to affect the economy. Our economy is based on consumer spending, and could not handle a drop in spending of even 10%, let alone the 20% - 25% I predict.

I very much beleive that establishing a national sales tax would increase everyone's belief in the law of unintended consequences...

What they predict or say is not always what the real outcome turns out to be.

I guess we're on the same page, here, Doc.

 

[DaveNay]

Posted on Wed, Nov. 02, 2005

Report targets key tax write-off

MORTGAGE INTEREST DEDUCTION WOULD BE SLASHED IN VALLEY

[size=-1]By Jim Puzzanghera[/size]

[size=-1]Mercury News Washington Bureau

[/size]

WASHINGTON - Responding to sharp criticism of plans to slash the deductibility of home mortgage interest, President Bush's tax-reform panel increased its proposed cap on the write-off by 25 percent in the final report it submitted to the administration Tuesday.

But that change wasn't enough to stop charges that, in seeking fairness for the federal tax code, the panel is unfairly targeting Silicon Valley and other high-priced regions. The panel argued that a dramatic simplification of the tax code and other changes, such as lower rates, would lead most taxpayers to see little change in their overall tax burden.

The proposed new cap on mortgages for which interest can be deducted -- ranging from $227,147 to $411,704 depending on a region's housing prices -- would still be far below the average home value in the Bay Area and other high-price markets nationwide. The median home price in Santa Clara County was $705,000 in September.

``We may have to downsize,'' said Anthony Dominguez, 35, a program coordinator with the Santa Clara County Probation Department, who bought a $1.2 million house with a $960,000 mortgage in June in Gilroy. ``I don't think it's fair.''

Full article available at MercuryNews.com

 

[OkeeDon]

"...other changes, such as lower rates, would lead most taxpayers to see little change in their overall tax burden."

The can also be read as, "some taxpayers will see a large change...". It's up to you to decide which will apply to you. I already know; I would pay more, a LOT more.

 

[Dargo]

Full article available at MercuryNews.com ... `We may have to downsize,'' said Anthony Dominguez, 35, a program coordinator with the Santa Clara County Probation Department, who bought a $1.2 million house with a $960,000 mortgage in June in Gilroy. ``I don't think it's fair.''

Okay, what am I missing here? What exactly does this guy do for the "Santa Clara County Probation Department"? I mean, c'mon on, the guy is 35 years old, has a minimum monthly mortgage and tax payment of over $7000.00 per month, plus all of his other expenses including insurance, automobiles, utilities, house upkeep, groceries etc. Based on the general rule of thumb that a lot of lenders use, keeping the mortgage and insurance payment at no more than 35% of gross monthly income, this guy is being paid a minimum of $250,000 per year to be a "program coordinator" for a probation department! I know I'm off the subject a bit, but that quote made me think that this guy is in over his head and is on a gravy train.

 

[Melensdad]

.


Seems to me we have a serious problem with this thread.

We have 2 topics. Both are very similar, yet very differnet.

Topic #1 is the new proposed tax code as outlined in my original post.
Topic #2 is the national sales tax model.

We have both in play. Just an observation.


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Doc, to your point that you would end up paying more due to your mortgage, by the calculations I ran you would have to meet the following criteria. First you would have to be a high income tax person today. Second, you would have to have a mortgage balance that is higher than your regionaly adusted average. Many people will fit into that criteria, but as the Democrats suggest, they are the same people who can afford to pay the taxes so it might be easy to suggest that those are the folks who should be soaked because they are 'rich.'

Of course, anyone who is 'rich' simply would change their situation under the new tax proposal and would pull money out of other investments (since the Capital Gains Tax, etc. would be eliminated/reduced) and pay down their mortgage to get their mortgage into the "regional average" range and therefore they would no longer be paying higher taxes.


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Dave . . . no arguement that some very isolated areas, like Silicone Valley will be unfairly hit by this tax, however, I think that the 'regionally adjusted' rates would probably offer some relief and perhaps might be given some extra-ordinary flexibility by the time this makes it into tax code (if it ever would).


------

Don, under the scenario of the porposed tax changes, if you have essentially no earned income because you are retired then you would fall into the category of "low income" citizens. I don't see how you would pay more. In fact, you won't pay income taxes under the proposal I outlined in my first 2 posts. You won't pay an AMT if I read that correctly. Assuming you are not a high income individual after retirement then you won't be hurt by the mortgage exemption changes. I guess I am confused as to how you would pay a lot more?

Now if you are talking about paying a lot more under the National Sales Tax proposal that was brought up later in the thread, I'd again say you are likely mistaken because you would fall under the low income provisions of the National Sales Tax proposals exemptions and I would think that you would find yourself in an even better situation.



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ALL: Bear in mind that I am not a tax accountant. These are my understandings & opinions based on what I have looked into. I am not providing tax advice under current or future tax proposals.

 

[DaveNay]

Okay, what am I missing here? What exactly does this guy do for the "Santa Clara County Probation Department"? I mean, c'mon on, the guy is 35 years old, has a minimum monthly mortgage and tax payment of over $7000.00 per month, plus all of his other expenses including insurance, automobiles, utilities, house upkeep, groceries etc. Based on the general rule of thumb that a lot of lenders use, keeping the mortgage and insurance payment at no more than 35% of gross monthly income, this guy is being paid a minimum of $250,000 per year to be a "program coordinator" for a probation department! I know I'm off the subject a bit, but that quote made me think that this guy is in over his head and is on a gravy train.

I can tell you from personal witness that it is quite common in the Chicago area for people to own these $1.5 - $2 million houses with manicured lawns and BMW cars, and on the inside is furniture from Ikea and nothing but Ramen Noodles in the kitchen.

 

[DaveNay]

ALL: Bear in mind that I am not a tax accountant. These are my understandings & opinions based on what I have looked into. I am not providing tax advice under current or future tax proposals.

DAMMIT MAN!!

{hurridly calls his broker to stop the stock purchase of Arthur Anderson.}

 

[Cityboy]

Human nature being as it is, I don't think there will be a reduction in spending. If you are frugal now, you will still be frugal with a NST. If you are a spender, you will likely continue to spend. People love to buy things. Look at your gross earnings on your check stub and think about taking that amount home every week or two weeks. People will probably feel like they have more money and therefore be willing to spend it just like they do now, and maybe even more so. That portion of the population that spends more than they make through undisciplined credit purchases will continue to do so. Those who are savers will keep saving. I can't logically see how spending patterns will decrease.

Also, market competetion will play a large part here. With the hidden taxes, expenses of withholding and other tax liabilities and considerations removed, companies will be able to reduce prices on products. Once one widget company reduces prices, it will force other widget makers to do the same to remain competetive. The free market is a good thing and a NST will fit right into our economy.

 

[Melensdad]

I can tell you from personal witness that it is quite common in the Chicago area for people to own these $1.5 - $2 million houses with manicured lawns and BMW cars, and on the inside is furniture from Ikea and nothing but Ramen Noodles in the kitchen.

Dave, I am constantly amazed at the homes people build today. I see it on this side of the Chicago area also. My house is 11 years old, it is a decent size, but it is NOT a million-dollar-plus-monster like they build today. I don't get the concept of the large shell homes that I see going up. I have people working for me that have larger homes than I and I just shake my head. Personally, I like having furniture (that I don't have to put together myself), real food, and the ability to sleep at night without worry about drowning in debt.


And as for the stock purchase . . . I am the last guy to ask. Seems like any stock I buy goes into tank shortly after I buy it.