Its been five years since former Senator Connie Mack, then chairman of the Presidents Advisory Panel on Federal Tax Reform, said the panel would take a fresh look at the existing Tax Code and will formulate options for making the tax system simple, fair and productive.
Last Friday, the Presidents Economic Recovery Advisory Board delivered its report on tax reform options to achieve three broad goals: simplifying the tax system, improving taxpayer compliance with existing tax laws, and reforming the corporate tax system.
The report of five years ago had more fanfare associated with it, while the one from earlier this week was low key by comparison. Both reports, however, deliver valuable insight into the tax system, and specific and valuable recommendations for tax policy.
Whether or not the recommendations of this latest report will have more productive consequences than the report five years ago did remain to be seen.
The Bush commission recommended two plans. Plan A, a Simplified Income Tax Plan, suggested creating four tax brackets of 15 percent, 25 percent, 30 percent and 33 percent. It replaced the standard deduction, personal exemption, child tax credit and earned income tax credit with family and work credits. It also detailed a reduction in long-term capital gains rates, replacement of the mortgage interest deduction with a credit, an end to tax-free health insurance from employers, and elimination of the deduction for state and local taxes. Of those recommendations, the last two have shown some traction in the present administration.
Plan B, the Growth and Investment Tax Plan, would create three tax brackets of 15 percent, 25 percent and 30 percent, and would levy a 15 percent tax on dividends, capital gains and interest. An immediate write-off of business investments would eliminate the complexities of the current depreciation system. Both plans eliminated the Alternative Minimum Tax.
In contrast, the PERAB proposals make no pretense of advocating a complete do-over of the tax system. Instead, they contain a set of options for simplification, compliance, and corporate and international issues.
PERAB makes the point that the complexity of the Tax Code is partly the result of the fact that new provisions have been added one at a time to achieve a particular policy goal, but with inadequate attention to how they interact with existing provisions.
This results in duplicative and overlapping provisions, multiple definitions of concepts like income and dependent children, differences in phase-outs, and differences in the timing of expiring provisions, the report stated. The tax code has become more complex and more unstable over the last two decades, in part because legislators have increasingly used targeted tax provisions to achieve social policy objectives normally achieved by spending programs. There have been more than 15,000 changes to the tax code since 1986, and a current [Joint Tax Committee] pamphlet lists 42 pages of expiring provisions.
The Bush panel made a similar point five years ago, when it observed that the code and regulations had more than doubled in terms of page length over the past 20 years (since the 1986 reform).
Naturally, after watching the proposals of five years ago fall mainly by the wayside, I dont expect many of the proposals of this board to make it into law anytime soon. However, there are a number of ideas worth considering, and the President has said he would soon propose new ideas to spur economic growth, including tax cuts. It is pretty likely that he will pick some of the ideas contained in the report. Lets hope he picks the good ones.
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