Committee for a Responsible Federal Budget

Senator Mike Lee Introduces Tax Reform Plan

Sep 19, 2013 | Taxes

On Tuesday, Senator Mike Lee (R-UT) presented his Family Fairness and Opportunity Tax Reform Act, which will be introduced in the coming days.

Senator Lee described his plan as a new, simple tax structure to address this country's inequality of opportunity and as a way to correct a tax penalty for being a parent.  He claims parents contribute to the economic system twice, once by paying taxes, and another time by bearing the costs of raising children, who will grow up to be the next generation of taxpayers.

Lee's tax reform plan has the following components:
  • Replace the current seven income tax brackets with two brackets, at 15 percent and 35 percent
  • Begin the higher bracket at $87,850 for individuals, which is the current breakpoint between the 25 percent and 28 percent brackets, but at double that amount ($175,700) for couples, therefore eliminating the so-called "marriage penalty"
  • Eliminate most deductions and credits not related to children, including the state & local deduction, the standard deduction, and the personal exemption
  • Create an additional $2,500 per child tax credit
  • Replace the personal exemption and standard deduction with a $2,000 personal credit
  • Reform the charitable deduction so it is available to all taxpayers
  • Reform the mortgage interest deduction so it is available to all homeowners, but limit it to the first $300,000 of a mortgage
  • Repeal the AMT and two taxes associated with the Affordable Care Act, the 3.8 percent surtax on high investment income and the 0.9 percent Medicare payroll surtax on high-earners

The Senator's tax proposal alters the tax code in a few important ways. Individuals in the current 25 percent tax bracket would see a nominal marginal rate reduction to 15 percent, while those in the 28 percent bracket would see a nominal marginal rate increase to 35 percent (some couples in the current 28 percent bracket, however, would have their marginal rate reduced to 15 percent due to the elimination of marriage penalties). Individuals making more than $400,000, currently paying a marginal income tax rate of 39.6 percent, would also see a nominal rate reduction. The fact that the brackets are double for married couples eliminates any sort of marriage penalty and increases marriage bonuses.

The centerpiece of Senator Lee’s plan is a new child tax credit. If taxpayers do not owe enough income tax to take advantage of the credit, the credit can offset payroll taxes paid by the employee and the employer. He would also maintain existing tax benefits for children, including the child tax credit, Earned Income Tax Credit, the child and dependent care credit, and the exemption for dependents.

Although the top rate decreases, there are several progressive elements of this plan. Replacing the personal exemption and standard deduction with his proposed credit equates to a larger effective "zero percent bracket," in which taxpayers would pay zero income tax. Under the current system, individuals earning $10,000 or less automatically pay no income taxes (because these two provisions equal taxable income), but this figure rises to $13,333 under Lee's plan. The plan would also repeal repeal regressive itemized deductions like the state and local tax deduction. Finally, the reformed charitable and mortgage interest deduction would be available to all filers, not just those who itemize, who tend to have higher incomes.

Lee presented his tax reform bill both as a way to correct penalties in the tax code, and as a way for Republican legislators to rally around an agenda responsive to the inequality crisis. Senator Lee has no official cost estimates of this bill, but expects to see a small reduction in revenue, though consistent with historical averages.

We applaud this new addition to the tax reform discussion. As Congress discusses tax reform this fall, they will benefit from having more ideas on the table, not less. We look forward to a more detailed look at his proposals when legislative language is released.

Tags