Reforming Individual Income Taxes: A Focused Approach (Part I of a BBB Critique)

The current discourse around individual income taxes is cluttered with temporary fixes, unpopular mandates, and provisions that miss the mark for many Americans. Instead of a sprawling bill, a more focused approach is needed, prioritizing permanent, common-sense changes while jettisoning controversial or ineffective measures. Here’s a look at what such a refined individual income tax bill should, and shouldn’t, include.

Core Tax Provisions: Stability and Simplicity

At the heart of a sensible tax reform should be the permanent extension of several key provisions initially from the Tax Cuts and Jobs Act (TCJA). This includes making permanent the modified individual income tax rates, the increased standard deduction, and the termination of personal exemptions. These measures offer a baseline of stability for taxpayers.

However, the idea of a temporary enhancement to the standard deduction, proposed for taxable years 2025-2028, should be rejected. Such short-term measures are often gimmicks, creating fiscal uncertainty and providing future leverage for increased government spending without addressing the immediate need for significant fiscal discipline now.

Problematic Credits and Deductions to Exclude:

Several proposed tax credits and deductions are either misguided or insufficient and should be excluded from a core individual income tax bill:

• Child Tax Credit (CTC): The proposal to extend and enhance the Child Tax Credit, even with a temporary increase to $2,500 for 2025-2028 before reverting to $2,000, is fundamentally flawed. These amounts are negligible in the face of real family expenses. This should be axed.
• “No Tax on Tips” and “No Tax on Overtime”: The proposed deductions for tip and overtime income for certain individuals (for 2025-2028) are problematic. While “no tax on tips” might seem appealing on the surface, it could be widely abused, especially under lax immigration enforcement. Moreover, the broader “tipping culture” itself warrants scrutiny. The “no tax on overtime” provision is particularly ill-conceived, as it could disincentivize productivity during standard working hours. Both these temporary measures should be axed.
• Exclusion for Car Loan Interest: Allowing the exclusion of interest on certain car loans from personal interest (for 2025-2028), even with income limitations, is a poor decision. Cars are already significantly overpriced, and such a provision would only exacerbate this issue by subsidizing debt for depreciating assets.
• “Trump Accounts”: The establishment of new tax-exempt savings accounts for individuals under 18, dubbed “Trump Accounts,” featuring a $1,000 one-time credit for eligible newborns, is an unnecessary and trivial initiative. A $1,000 one-time payment does nothing to address long-term financial security and is a pork-barrel project benefiting financial institutions. This should be stopped.
• Partial Deduction for Charitable Contributions for Non-Itemizers: Reinstating this deduction (for 2025-2028) is questionable. The nature and impact of many charitable contributions are often opaque, and without substantial cuts to government spending and a more transparent charitable sector, this provision should be eliminated.

Measures Deserving Separate Consideration:

Some proposed tax changes, while potentially popular or beneficial, are significant enough or distinct enough in their purpose that they warrant consideration as separate, standalone bills rather than being bundled into a comprehensive individual income tax overhaul:

• Estate and Gift Tax Exemption: Permanently extending the increased estate and gift tax exemption amounts, with a further enhancement to $15,000,000, is a major policy decision that deserves its own deep analysis and legislative process.
• Enhanced Deduction for Seniors: An enhanced deduction for seniors for taxable years 2025-2028 is likely to find broad bipartisan support. Such a targeted benefit should be presented and voted on as a single, clear bill.
• Employer-Provided Child Care Credit and Adoption Credit: Enhancements to these credits are also likely to be widely supported and address specific social goals. They should be considered independently.
• Expansion of 529 Account Eligible Expenses: Allowing 529 accounts to cover additional K-12, homeschool, and postsecondary credentialing expenses is another provision with potential widespread appeal that should be debated and passed as a standalone measure.

Simplification: Abolish the AMT

The Alternative Minimum Tax (AMT) has long been a source of complexity and frustration for taxpayers. Any meaningful tax reform should include the complete abolition of the AMT, rather than merely extending increased exemption and phase-out thresholds.

Items of Lesser Concern (for some):

Extensions of limitations on deductions for qualified residence interest, casualty losses, miscellaneous itemized deductions, moving expenses, and wagering losses may affect certain taxpayers. However, for a generation that has no homeownership and increasingly skeptical of insurance mechanisms (especially in light of issues like wildfire insurance claim handling), these provisions are of lower priority for broad reform.

By focusing on permanent, simplifying measures and stripping away temporary, controversial, or niche provisions, a more effective and understandable individual income tax system can be achieved. Those items with broad, bipartisan appeal or significant standalone impact should be treated as separate legislative efforts.