Wyden's bold tax plan.

Byline: The Register-Guard

Ron Wyden occupies the seat Bob Packwood once held in the U.S. Senate, and has now picked up his predecessor's mantle as a tax reformer. Packwood's tax reform of 1986 was the most far-reaching overhaul of the tax code in a generation. Wyden has advanced a similarly bold proposal that aims for the same goal of simplicity, with an added accent on fairness.

Wyden's plan, the Fair Flat Tax Act of 2005, would replace the six current personal income tax rates with three - 15 percent, 25 percent and 35 percent. Corporate income would be taxed at a single flat rate of 35 percent. The proposal would eliminate many of the personal and corporate tax breaks that encrust the existing tax code, and would allow all taxpayers, not just those who itemize, to deduct state and local taxes from their federal income tax forms.

Most significantly, Wyden calls for taxing all income equally, regardless of its source. Interest and dividends would be taxed at the same rate as wages and salaries, eliminating the preferential treatment for investors over workers.

In terms of simplification, the similarities to Packwood's reform are striking. Packwood's plan abolished many deductions and exclusions, compressed 14 income tax brackets into two, and ended a partial exclusion of capital gains from taxation. By reducing the number of tax breaks, Packwood was able to lower most people's tax rates. Wyden's proposals would have the same effect, reducing taxes for most families with incomes of $150,000 or less and yielding a $100 billion reduction in the deficit over a five-year period.

One difference between the two Oregon senators' plans is in their political prospects. Packwood, a Republican, was chairman of the Senate Finance Committee at a time when the White House supported tax simplification. Wyden, a Democrat, is a member of the committee's minority at a time when the White House and Congress are preoccupied with making permanent the tax reductions approved during President Bush's first term. Packwood's plan became law; Wyden will be lucky to get a hearing.

Tax simplification, however, has perennial appeal. This month the President's Advisory Panel on Federal Tax Reform, noting that Congress has approved 15,000 changes in the tax code since Packwood's 1986 reform, called the current income tax system "a running joke." The panel advanced a pair of proposals, each of which would achieve lower rates by eliminating the deductions for mortgage interest, state and local taxes and health insurance premiums. Wyden's plan leaves those sacred cows in the pasture, which could make his proposal a more saleable vehicle for tax simplification.

Simplicity is a virtue of any tax system; fairness is another. Wyden's idea of equalizing the tax treatment of all income - whether it comes in the form of a paycheck or a stock dividend - has powerful appeal. The preferential tax treatment of investment income clearly favors the richest taxpayers. In Oregon, according to the state Department of Revenue, the richest 5 percent of taxpayers received 40 percent of all income from interest and dividends, and 79 percent of all income from capital gains.

Tax rates on interest, dividends and capital gains were cut during the Clinton administration, and again under President Bush, as a means of encouraging investment and savings. The resulting disparity in tax rates is manifestly unfair to those who rely on income from salaries and wages. A middle-class taxpayer who gets a $1,000 raise will forfeit 25 percent of it in federal income taxes, plus Social Security taxes. The same amount paid in dividends, interest or capital gains is taxed at a rate of no more than 15 percent, with no Social Security bite.

This aspect of tax policy has the effect of punishing work. Wyden's plan would level the economic field, ensuring that Joe Sixpack's final dollar of wage income is not taxed at a higher rate than Donald Trump's next dollar in dividends.

By proposing to address an inequity that has become deeply ingrained in the tax system to the disadvantage of most American taxpayers, Wyden has given his party a potent issue - if Democrats have the will to pick it up.