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Friday, December 10, 2010

LYNN BERGMAN: DEBT COMMISSION HITS A HOME RUN!

 

 

 

An exhaustive examination of post World War II tax revenues was undertaken. Revenues were compared with the top marginal tax rate.

 

The results revealed that as top marginal tax rates were incrementally reduced from 94% in 1945 to 28% in 1988, revenues continued on an upward trend.

 

Since 1988, however, as the top marginal rate was increased to 39.6 in 1993 and subsequently lowered slightly to 35% in 2003, revenues have been eroded. The dot-com and housing bubbles and world financial crisis have camouflaged the erosion in revenues but an increase in the top marginal tax rate on January 1st, 2011 would strike a deadly blow to an already weak recovery.

 

Revenues have eroded due to the increased top marginal rates coupled with a historic lack of restraint by congress in granting exemptions to both individuals and businesses. The theory of increased revenues resulting from lowering rates was valid; but excessive and unequally applied exemptions will eventually doom the income tax as a revenue source if they are not eliminated. Unfortunately, long before the income tax becomes irrelevant our nation will find itself in bankruptcy…at the mercy of debt holders Japan (31%), China (15%), the United Kingdom (9%), and the oil exporting countries (5%).

 

The solution to such erosion of revenues (due to excessive exemptions and increased top marginal rate) was very well presented in the final report of the Draft Debt Commission. These guys know what they are doing when it comes to the income tax!

 

Debt Commission Reform: Lower Income Tax Rates & Eliminate Deductions

 

The debt commission’s final report included recommendations to lower income tax rates and simplify the tax code. The alternative minimum tax would be abolished and hundreds of tax breaks in the federal code would be eliminated.

 

The first step toward national fiscal responsibility should be the extension of the Bush tax cuts for only one year while congress implements this most important element of the debt commission’s recommendations. At the end of one year, if congress has not implemented the commission’s recommendations to reform the income tax code, we would know that congress is not up to the other debt commission  tasks and needs to be replaced ( as much as possible, given that only 1/3 of the senate is up for re-election in 2012).

 

November 2012 is coming

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