Not being a federal tax policy expert (outside of my in-depth knowledge of TurboTax), I don’t know if Cato’s “dual-rate income tax” proposal is “The Solution” or not, but it seems compelling and should at least be thrown into the mix of tax reform options along with the flat tax, the national retail sales tax, and other competing ideas:
“The president’s advisory panel will likely consider plans for consumption-based taxes, as well as more limited income tax reforms. A “dual-rate income tax” is a model for reform that would reduce tax rates and simplify the code, while taking steps toward a flat and neutral consumption-based system. Under the plan, most deductions and credits would be eliminated, but nearly all families would pay tax at a low 15 percent rate. A 27 percent rate would kick in for earnings above the threshold that the Social Security payroll tax cuts out. The effect would be to cut tax rates on middle-income families and create a consistent marginal rate of about 29 percent on wages. To promote savings and economic growth, the maximum individual rate on dividends, interest, and capital gains would be set at 15 percent. The corporate tax rate would be dropped to 15 percent and interest made nondeductible. These changes would equalize and cut the combined top federal tax rates on dividends, interest, wages, and small business profits to less than 30 percent, compared to 35 to 45 percent under current law.”
Here’s the link.