by Archie M. Richards, Jr.
October 2, 2006

Personal income taxes for 2006 have been cut a little, although Congress hasn't gone nearly far enough. Here are the current changes:

• The maximum amount that workers under age 50 can contribute to 401k plans is raised to $15,000, up from $14,000 last year. Workers 50 or older can sock away as much as $20,000, up from $18,000.

• The maximum amount people under age 50 can contribute to an IRA remains at $4000. But those 50 or older can now put away $5000, up from $4500.

• For the years 2006 and 2007, taxpayers 70½ or older can donate up to $100,000 a year from their IRA directly to qualified charities without triggering federal income taxes. The money counts toward the taxpayer's required minimum distributions.

• Inherited 401k plans no longer have to be closed in 5 years, with big taxes paid. A plan can now be converted into an inherited IRA, with distributions spread over many years, reducing the tax burden.

• You can now take a tax credit of up to $500 lifetime for making energy-efficient improvements to your home, including solar water heaters and solar electricity equipment. For many taxpayers, the purchase of a hybrid and other alternative-fuel vehicles also qualifies.

• For children who received dividends, interest or other unearned income, the first $850 is tax free and the next $850 is taxed at the child's (presumably lower) tax rates. Income above $1700 is subject to the parent's top rate. The problem is, parents may now be taxed on the unearned income of children even up to 18 years old (no longer 14). Only when the kid reaches 18 is her income out of the picture for taxation at the parent's top rate.

  Sorry, but every one of these changes is bad public policy. Instead of carving out picayune changes like the above, Congress should instead broaden the income tax and enact a flat rate. The recommendations of Steve Forbes are terrific, as follows:

• The income of individuals and corporations would be federally taxed at only 17 percent.

• Each adult could take an exemption of $13,200.

• For each child or dependent, a $4,000 exemption, plus a $1,000 tax credit per child.

• Companies could expense all investments immediately, with no depreciation schedules.

• No taxes on dividends or capital gains. No death tax and no Alternative Minimum Tax.

• Those who want to preserve their current deductions could choose to pay tax under the current system.

• The federal tax form would be the size of a postcard.

Under the Forbes flat-tax plan, a family of 2 parents and 2 kids would pay no federal tax on the first $46,165 of income. With 4 kids, up to $65,930 would be tax free.

Oh yes, and under the Forbes system, taxes couldn't be raised without the approval of 60 percent of members of both the House and Senate.

Americans spend more than 6 billion man-hours a year to complete their tax returns, for a cost of something like $200 billion a year - an utter waste! With the current IRS Code 60,000 pages long, people engage in many useless activities to take advantage of the government's maze of deductions.

When rich people are taxed heavily, they don't have the money to finance the factories, machinery, and other capital equipment that make individual workers productive. Without the capital equipment, workers don't get hired in the first place.

The top income-tax rate was once 70 percent, which brought high unemployment. With the top rate now 35 percent, unemployment is much lower. But the above changes would make the economy even healthier.

Income-tax rates were cut in the 1920s, the 1960s, the 1980s, and in 2003. Every time, the economy spurted ahead, jobs were created, and federal revenues came in like gangbusters.

Congress should knock off the tax nitpicking and enact broad reform.