american-tax-policyYesterday, Sen. Mike Lee (R-UT) gave a speech on tax reform at the American Enterprise Institute that has been praised by many conservatives. Here’s what you should know about Lee’s proposal.

What exactly did Sen. Lee propose?

The “Family Fairness and Opportunity Tax Reform Act” is a proposal by Sen. Lee to deal with the individual income side of the tax code (not the corporate side) by making it more “family-friendly” and eliminating what Sen. Hill calls the “parent tax penalty.”

What is the parent tax penalty?

While Social Security and Medicare are often referred to as “insurance” programs, they are really generational transfer payments. Younger workers pay for the elderly and retired. The FICA and Medicare taxes taken out of a worker paychecks today are used today to directly pay for these benefits to seniors.

Sen. Lee notes that this structure requires that parents contribute twice — by paying FICA and Medicare taxes and by bearing the economic costs of raising children. According to Lee, this is essentially a “capital gains” tax on children (who will later provide the human capital for the generational transfer payment system).

Can you give an overview of Lee’s plan?

The gist of the plan is a proposal to consolidate tax brackets, simplify the tax code, repeal the AMT and Obamacare tax hikes, lower individual tax rates, and begin to address the parent tax penalty.

Okay, so what are the general details?

The new plan would:

• Establish two individual income tax rates: 15% on all income up to $87,850—and twice that amount for married couples—and 35% on all income above that.

• Eliminate most existing deductions and credits not related to children.

• Raise the per child tax credit from $1,000 to $2,500

• Provide a $2,000 personal credit to replace the personal exemption and standard deduction.

• Include a new charitable deduction that would be available to all taxpayers, not just those who itemize deductions.

• Replace the current mortgage interest deduction with a new one that is available to all home-owners and is capped at $300,000 worth of principal.

What if a parent doesn’t pay income taxes?

The new child-care credit would apply not only to income taxes, but also to parents’ payroll tax liability on both the employee and employer sides.

Anything else I should know?

Lee says this plan is merely the first phase. The future goals of his tax plan are to:

• Lower rates and simplify the code further.

• Increase the child credit even more.

• Reform the way we tax investments and business income.

• Reform the welfare system to harmonize with this new tax code so that federal policy seamlessly promotes opportunity and upward mobility for underprivileged families as they work their way into the middle class.