Itâs been five years since Connie Mack, as chair of President Bushâs Advisory Panel on Federal Tax Reform, said that it would âtake a fresh look at the existing Tax Code and will formulate options for making the tax system simple, fair and productive.
Fast-forward to 2010.
With little fanfare, in August President Obama's 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."
THEN AND NOW
The Bush proposal contained two plans: Plan A, a Simplified Income Tax Plan, and Plan B, a Growth and Investment Tax Plan.
By contrast, the PERAB proposals make no pretense at creating a complete do-over of the tax system, but instead contain a set of options for simplification, compliance, and corporate and international issues.
The PERAB simplification options are grouped into simplification for families; savings and retirement incentives; capital gains; tax-filing small businesses; and the Alternative Minimum Tax. The report also weighs in on tax compliance, corporate tax reform and international corporate tax issues.
Ed Karl, vice president for taxation at the American Institute of CPAs, noted that the institute has long been promoting a simpler and fairer Tax Code. "It's something we've been engaged in for a very long time," he said. "We don't believe it's possible to remove all complexity from the Tax Code, but we do think a significant amount of simplification is achievable, and it would be beneficial for everybody - individuals, business, government and the economy in general."
"We don't take a position on any specific proposal," he added. "The bottom line is we're pleased the administration is continuing a focus on simplification, and in the report they have adopted some very specific technical suggestions made by the AICPA."
Among the dozens of ideas described in the report are some of the key provisions of the Bipartisan Tax Reform and Simplification Act authored by Senators Ron Wyden, D-Ore., and Judd Gregg, R-N.H., which they proposed in February.
The PERAB report includes the following provisions to simplify the Tax Code that are also proposed in the Wyden-Gregg bill:
Eliminate the AMT.
Provide taxpayers with the option to get a pre-filled-out tax form from the IRS to simplify the filing process.
Raise the standard deduction amount to spare many taxpayers the additional burdens of recordkeeping and reporting for their itemized deductions.
Consolidate and simplify the 18 current tax incentives for education.
Consolidate and simplify more than 20 provisions in the Tax Code that encourage savings for retirement and other purposes.
Reduce the corporate tax rate, and broaden the corporate tax base.
Create a more level tax treatment of debt and equity so that businesses don't have incentives to take on excessive debt burdens that make them vulnerable in times of economic distress.
Reform how U.S. multinationals are taxed on their overseas earnings to reduce incentives to ship jobs and investment overseas.
"A lot of these options are things they need to do, like simplify the tax treatment of retirement accounts and various kinds of savings accounts," said Rudolph Penner, institute fellow at the Urban Institute and a former director of the Congressional Budget Office. "But it's a shame they couldn't be stronger in advocating even more radical tax reform."
PROS AND CONS
"Many of the decisions have winners and losers," Penner opined. "It's not clear how they decided to not raise taxes on anyone who is not rich. Some of the consolidations would clearly raise taxes for some."
George Pieler, former tax counsel to the Senate Finance Committee, agreed. "They were told not to create any tax increases for those making less than $250,000, but you can't look at taxes in a comprehensive way without getting into that area. Some of the consolidation of credits, deductions and savings incentives would certainly raise taxes for individuals in that group."
Moreover, while it may seem reasonable to consolidate credits or deductions that are aimed at the same purpose, the consolidation makes it all the easier to eventually raise taxes, he suggested. "The problem is when you have one big credit or deduction, it's not as well-tailored for every purpose," he said. "And if you have 10 different incentives for education and want to raise revenue, you have to go after them one by one. It's a harder political battle. Part of the motivation behind these proposals is to make it easier to go after some of these preferences in the future for revenue-raising purposes. They're all designed to eventually raise revenue, but they're being marketed as tax reform."
The PERAB report 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 PERAB 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 ... . There have been more than 15,000 changes to the Tax Code since 1986, and a current [Joint Committee on Taxation] pamphlet lists 42 pages of expiring provisions."
"That's the problem with serious tax reform," Pieler explained. "It's never as easy to keep out additions to the provisions you harmonize and simplify. The complexity comes back in anyway, because legislators want their names attached to a provision."
Nevertheless, given the continued congressional interest in reform and general bipartisan agreement on some of the proposals, it is likely that some of them will be enacted separately, if not as a comprehensive package.
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