Rep. Paul Ryan has introduced a bill to accomplish two things: end the Alternative Minimum Tax, and give individuals a much simpler alternative to the obese, special-interest-infested income tax code. Ryan's bill would allow individuals to choose a simpler, dual-rate income tax (10% and 25%) with few deductions. (Ryan's press release here; text of bill here.)
Individuals would still be able to choose the current code with its multitude of deductions, complexity, and higher rates on taxable income. My guess is that most taxpayers would go through both calculations, then choose the smaller number (I would)—but others would simply fire their tax accountants and choose the simpler way. [I suppose there could be a third category: those who think we don't pay enough tax today. Fortunately for them, I'm almost certain the IRS accepts payments over and above the amount actually owed, as long as it's designated properly; eg, "my contribution to deficit reduction or surplus enhancement."]
Rising personal taxes
I decided to check the history of "personal current taxes" as a share of the economy (%GDP). [In the NIPA tables, that number includes federal, state, & local taxes, but 85% of it is federal individual income taxes.] As usual whenever I check the numbers, there was a bit of a surprise—one that gets little mention in the headlines for some reason: personal taxes have been increasing dramatically since 2003. Personal current taxes now match the LBJ peak of 1969 (10.8% GDP), and are almost back to the Carter peak of 1981 (11.0% GDP); the trend is pointing toward a new all-time high (more than 13.0%) within just a few years. I hope there's time to stop it; Ryan's bill might be just what we need, and just in time.
Here's the chart that surprised me; click to enlarge:
Personal taxes are growing faster than the economy, while more and more people are paying zero or negative income taxes. In other words, not only are personal taxes rising, but the system is becoming more progressive.
I have no argument against the progressivity, but the level of personal taxes looks high enough to me. For that reason, I hope Paul Ryan's plan catches on; maybe that would level things out at the Carter peak (11.0%), two points below the all-time high.
The growing economy since 2003, with no change in federal income tax rates, is responsible for the increasing personal taxes, largely because of low unemployment and the bracket-creep effect of rising incomes. An interesting brain teaser is to ask, Which would be better for keeping the economy growing: the current income tax structure, Ryan's proposal, or a tax-rate increase? Which would be more likely to slow down the economy?