It’s doubtful whether the tax changes proposed by the President in his speech on Wednesday would generate much of a dent in the deficit, even if they were to be accepted by Congress.
After all, the issue with the deficit is not so much a revenue problem as it is a spending problem.
But the plan to attack the deficit by eliminating many deductions, credits and other incentives could actually be a step toward one goal of tax reform, which is to simplify the code.
It may be a coincidence, but the president’s speech was scheduled for the same day that the House Ways and Means Committee heard testimony on “How the Tax Code’s Burdens on Individuals and Families Demonstrate the Need for Comprehensive Tax Reform. In his opening statement, chairman Dave Camp observed that with nearly 4,500 changes in the last decade— 579 of them in 2010 alone—the code is too complex.
“Adding to that complexity is the fact that each Tax Code provision is a little bit like a cell. Each one has its own distinct features, characteristics and lifespan” he said. “And while 20 years ago, it was mostly businesses affected by the temporary nature of tax provisions, now families and individual taxpayers are held captive to the calendar.
In testimony before the committee, Annette Nellen, CPA, Esq., chair of the AICPA Individual Income Taxation Technical Resource Panel, observed that just in the area of education alone, there are 14 complex incentives with differing requirements, eligibility rules, definitions and income phase-outs.
Nellen, director of San Jose State University’s graduate tax program, cited the numerous and differing requirements for the education incentives, all of which are designed to encourage saving and spending on education.
“For example,” she stated, “eligibility for one of the two education credits depends on numerous factors including the academic year in which the child is in school, the timing of tuition payments, the nature and timing of other eligible expenditures, and the adjusted gross income level of the parents or possibly the student. Further complicating the statutory scheme, the code precludes use of the Lifetime or Hope Credit if the child also receives tax benefits from a Coverdell Education Savings Account.”
“Although the child can elect out of such benefits, this decision also entails additional analysis,” she added, noting that the IRS publication to explain the income tax rules on education incentives, Publication 970, is 86 pages long.
“Further, use of one benefit likely precludes use of another, making it difficult to know which is the best incentive to use,” she said in her oral testimony. “This confusion leads some individuals to forego the tax benefit altogether and some to claim credits beyond what they are entitled to. The AICPA recommends, at a minimum, consolidating the education provisions and providing uniform definitions.”
While the President’s proposals, which he called “spending cuts,” might have an element of reform, that’s not the immediate intention, of course. Ultimately the motivation behind the elimination of tax preferences is clearly increased revenue.
Camp, who attended the President’s speech immediately after the committee’s hearing, resisted the allure of a possible increase in tax revenue. What is really needed, he said, is revenue-neutral tax reform that lowers rates and broadens the base. “Our approach is pro-jobs, and independent economists have estimated that, when coupled with spending restraint, it can spur the creation of up to 1 million jobs next year alone.”
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