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Thompson Proposes US Flat Tax

by Mike Godfrey,, Washington

27 November 2007

Republican Presidential hopeful, Fred Thompson has unveiled his proposed plans for reform of the US tax code, which would give taxpayers the option of using a simplified flat tax system and significantly reduce corporate tax for US businesses.

The former Tennessee Senator, turned television personality, announced at the weekend that his 'seven-point plan' would make it easier for small businesses to invest and grow, encourage large employers keep jobs in the United States, and give taxpayers the flexibility to pay a simplified, flat tax rate.

"The solutions to challenges in our economy are found in the homes and small businesses of ordinary Americans, not in the halls of Washington," Thompson stated. "My plan allows Americans to have greater control of their own money."

Thompson's tax reform plan contains proposals to permanently extend the 2001 and 2003 tax cuts due to expire by the end of 2010, to permanently repeal the estate tax, and to reduce the US top corporate tax rate from 35% to no more than 27%, which is the approximate average of the world's leading economies.

He is also proposing that small business expensing be extended permanently to encourage greater investment and growth. Current law allows small businesses to write-off purchases of equipment of up to $125,000 per year, rather than depreciating those assets over time.

Depreciation schedules would also get a makeover under the Thompson plan, to both update and simplify the depreciation rules. Current depreciation schedules, he argues, are outdated and in many cases do not reflect the realistic useful life of an asset, especially for investments in high technology. He cited as an example investment in computers, which currently must be depreciated over three years, even though they become obsolete in half that time.

However, perhaps the most interesting facet of Thompson's plan is his idea to give US taxpayers the option to file under the current tax code, or a simplified, flat tax code.

Under the simplified tax code, there would be two tax rates: 10% for joint filers on income of up to $100,000 ($50,000 for singles) and 25% on income above these amounts; the standard deduction would be more than doubled to $25,000 for joint filers and $12,500 for singles; and the personal exemption amount would be increased to $3,500.

As a result of these changes, a family of 4 would be exempt from income tax on the first $39,000 of income, Thompson claimed. Moreover, he is proposing that the simplified tax code would contain no other tax credits or deductions. It would also retain the 15% tax rate on capital gains and dividends.

According to Thompson, this would "dramatically simplify taxes for tens of millions of Americans" and serve as a "stepping stone to fundamental tax reform".

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