Not much has been said about Bush's White House panel on restructuring the tax system report. This is probably because it was dead before it even was finished printing and delivered to the president.
The plan was produced by a bunch of academics who still believe that trickle down economics actually works to the benefit of most Americans.
In order to pay for the elimination of capital gains tax and tax on other non-earned income, the panel suggested getting rid of deductions for home mortgages, health care costs, state and local taxes, and education.
This would give the uber rich the ability to pay no taxes on money they didn't work for in order to take benefits away from the middle class. This plan hits the middle class the hardest in many ways and shifts the tax burden from the wealthy to the middle class.
First, most middle class wage earners don't pay enough in capital gains and non-earned income to off set the increase in taxes they would pay for the loss of traditional deductions. The majority of investment income is not taxed as it is for the middle class because it is sitting in 401k, IRA, and other retirement funds. These funds are not taxed until withdrawal (or not taxed at all for a Roth IRA) and then are usually taxed at a lower level. Additionally, in a time where Social Security is not secure for the future, the Bush plan would discourage contributions to retirement funds since they would no longer have tax advantages, thus putting us at an even greater vulnerability for not having saved enough to retire.
Second, it would raise your local and state taxes. One of the ways that state and local governments are able to function is through the sale of municipal bonds. These bonds are attractive to investors because the interest o them is tax free. If you scrap the tax on capital gains and other non-earned investment income, these municipal bonds loose their tax advantage luster. In order to compete in the investment market, municipalities would have to offer bonds with a higher yield. Since the investment yield on bonds is often funded by tax revenues and revenues for services (water, sewage, etc) these local government would have to increase tax revenue or raise service rates to pay for it. Since you would no longer be able to deduct state and local taxes, this would be a double whammy to the wage-earning citizen.
Third, Bush claims he wants to create an "ownership society," but scrapping the home mortgage deduction would have two effects. First would be to put the price of a home out of reach form many Americans. The second would be to deflate the house market. Many Americans have the majority of their assets in their home. Depending on the current APR, this would depress the value of a home from 9-18%. Since many American depend on the equity of their homes for loans and retirement, this again hits the middle class.
Fourth, getting rid of the health care deductions of both employers and individuals, you place the ever growing cost of health care squarely on the individual. The only way companies are able to provide health care is because it is deductible. Savings accounts, as the panel proposes is far out of reach for most Americans, and would dramatically hurt anyone with chronic health problems.
Fifth, by disallowing interest deductions for businesses, it places a substantial block for entrepreneurs and small businesses from entering the market or acquiring needed capital for start up and continuation costs.
Sixth, by disallowing interest deductions for businesses, it would put many family farms out of business since they are often run on a leveraged basis.
These are just a few of the many problems that the panel's proposal would cause. No one other than wealthy investors, investment banks and brokerage houses would benefit from the proposal. If Bush ever tries to push this as a bill to congress, expect a large reaction from almost every industry and citizens group for its defeat and quick burial.
Bush's Panel May Propose Version of Flat Tax in Final Report