Ladies and gentlemen, a tax reform: consider this ten-point plan

THE president's tax commission got some bad news on October 15. The Washington Post editorialized in its favor: "[T]he reform panel is heading toward politically explosive but sensible suggestions." Every time in the last decade that the Post's editorial page has commended Republicans for advancing wise but politically risky policies, it has turned out badly for Republicans. The Post praised Newt Gingrich for trying to rein in Medicare costs in 1995. It praised President Bush in 2005 for being willing to reduce future Social Security benefits. Each proposal cost Republicans dearly.

The current case looks to be no different. The tax code allows people to deduct interest on mortgages worth up to $1 million. The commission reportedly favors gradually limiting the deduction to mortgages of up to $350,000. That's probably sensible policy. The federal government shouldn't be propping up the value of McMansions. But the affected voters, many of whom are Republicans, would probably not agree. Perhaps none of that would matter if President Bush still had an 80 percent job-approval rating. But he's running at less than half of that.

The commission's plan is supposed to simplify the tax system, encourage economic growth, and raise roughly the same amount of money as the current tax code. Proposals that meet these parameters generally don't have much chance of enactment. Yet it may just be possible to devise a politically viable plan that advances conservative policy objectives. Paradoxically, it becomes easier to think up such a plan if another objective is added to the mix: Tax reform should be pro-family, too.

Republicans tend to describe any tax relief as "pro-family," but the term should be understood in a specific sense. That the tax code penalizes investment is something that the commissioners understand. But they do not seem to understand that the tax code punishes investment in children. In previous generations, the tax code made more allowance for the costs of raising children. But decades of inflation have eroded those provisions. Federal policies let childless people free-ride on the financial sacrifices of parents, who raise the children who will one day pay for everybody's Medicare and Social Security. A pro-family tax cut would address that problem, too.

Here's what a ten-point plan for a pro-family tax-reform plan might look like.

1. Start with the current tax code, rather than trying to design a new one from scratch.

2. Triple the standard deduction. The current tax code gives you a personal exemption ($3,200 per person). It also lets you take either the standard deduction ($5,000 per adult) or various itemized deductions (for health-care spending, state and local taxes, and other costs).

Fold the personal exemption and most of the itemized deductions into a much larger standard deduction of $15,000 per adult. The basic cost of living would not be taxed.

3. The itemized deductions for mortgage interest and charitable donations, however, should be kept. Under current law, people can take those deductions instead of the puny standard deduction. They won't take them if the standard deduction is tripled--and that could disrupt real-estate markets and charitable giving. So allow people to take these deductions in addition to the standard deduction. If we do that, though, more people will take the deductions. So the deductions will have to be a bit smaller. We might, for example, have to take the $1 million limit on the mortgage deduction down to $800,000.

4. Get rid of the alternative minimum tax for individuals. The AMT was originally designed to keep rich people from taking so many tax breaks that they paid almost nothing in taxes. But it has turned into a second tax system for an increasing number of middle-class families.

5. Fold the existing child credit, the child-care credit, and the adoption credit into a new, enlarged child credit of $2,500 per child--available, in full, to all households with children. This credit would be applied against income taxes.

6. Eliminate the "head of household" filing status. It's a way of helping single parents. But it makes more sense for single parents to file as singles while an expanded child credit helps children regardless of their parents' relationship.

7. Cut taxes on capital. Tax dividends once, either at the corporate or at the individual level. Treat capital gains as regular income--but exclude 50 percent of net long-term capital gains. Tax estates at the same rate as long-term capital gains.

8. Cut corporate taxes. Bring the top tax rate down to 32 percent. Where the tax code allows companies to take a full deduction on an investment in plant and equipment the year it is made, let them continue to do so. Other corporate investments should follow a new rule: Eighty-five percent of the cost should be deductible in the year it is incurred.

9. Replace the six individual income-tax rates with two, set at 16 and 32 percent. The border between them should be set so as to raise the same amount of revenue as the current tax code. Wherever that threshold is set for individuals, it should be set at twice that level for joint filers.