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Friday, May 19, 2017

What's simple about a postcard size tax return?


The House Republican tax reform blueprint touts that the individual system would be so simplified that individuals would have a postcard-sized return. Speaker Paul Ryan's 5/19/17 op ed in the Kenosha News states: "Imagine being able to file your taxes on a postcard." 

This isn't a new suggestion. The Hall-Rabushka flat tax first introduced in 1982 touts that both individuals and businesses would file postcard-size returns (also see chapter 3 of their Flat Tax book).

My concerns with the postcard size return include:
  • It sounds like something filled out by hand and mailed in. Why not instead say that it will be so simple that your tax adviser or if you chose, the IRS, can compute your taxes for you and securely text or email you the amount owed which you can use your bank app or Paypal or some type of debit card option to receive a refund or pay an amount owed.
  • The size of the return is not tied to complexity. Even today, we can file on a postcard if the IRS would be fine just knowing our AGI, taxable income, total credits (including withholding), tax and amount owed or to be refunded.
  • The House blueprint postcard is missing a lot of information such as the taxpayer's name and contact information, signature line, where you want your refund (if any) deposited, and the penalty of perjury statement.
  • Gen Z filers might wonder what a postcard is.
What is a better / alternative message to sell simplification via tax reform to individuals?  Letting taxpayers know they can log into their secure online IRS account by February 1 to see their tax calculation based on all of the information returns the IRS has including W-4 information on filing status and number of dependents. If they have other transactions, they can easily add them in. If they prefer, they can set up with a tax return preparer or software provider to have this information show up on an account the taxpayer has created with them. This would also aid the filer with state tax obligations and more complicated aspects of income tax calculations such as dealing with partnership or other business income, retirement plan deductions or distributions, etc. 

Another part of the message that can help, perhaps is that the standard deduction is higher and personal and dependent allowances are in the form of a single tax credit (rather than having deductions and credits).

What do you think?

Sunday, May 14, 2017

10th Anniversary Blog Post

On 5/14/07, I started this blog.  While we are 17 years into the 21st century, many aspects of our tax administration system and rules are stuck in the 20th century. Also, we tend to ignore trends to see how they should shape tax systems and compliance.

I started the 21st century taxation website and blog while I was a fellow with the New America Foundation. The focus for fellows was to get new ideas out to lawmakers and the public, such as through op eds in newspapers. In addition to that, I started the blog and am glad I did. It's fun and a good way to connect to lots of people via the Internet and search engines.  The blog gets over 12,000 hits per month.  And it connects me with other bloggers - on tax, technology and more, which continues to be fascinating.

Here are a few items I expect to be blogging in my 11th year:
  • Federal tax reform and how the proposals stack up against principles of good tax policy and reflect how we live and do business today.
  • How to pay for lower tax rates that will certainly be part of tax reform. There are lots of special exclusions, deductions, credits and preferential rates that cause rates to be high today and limit the tax system in meeting principles of good tax policy.
  • How to modernize worker classification rules and why.
  • How new and existing technologies should be used to truly simplify income tax compliance and perhaps even reduce the tax gap.
  • State tax oddities and how to address them.
Anything on your list that is not on mine?

Comments?  Please leave them.  Thanks for reading!!

Monday, May 1, 2017

Tax principles for the digital age

At the start of the 21st century, I was involved with a project with the AICPA on tax reform. An outcome of our task force work was a set of ten principle of good tax policy. The goal was for lawmakers to apply these to both existing tax rules and proposals for change to identify where they did and did not meet the principles. Where not met, hopefully improvement could be made.

Another AICPA task force 15 years later (I chaired both, as I've been talking about tax reform for a long time) reviewed the 2001 principles and updated them for a more global, technology-focused perspective.

Fellow AICPA members and professors Ellen Cook and Troy Lewis and I have an article about the 12 principles of good tax policy in the May Journal of Accountancy, which you can obtain for free here. The statement can be found here.

I hope you'll take a look and see how these factors could help shape current tax reform discussions. An example of the application of the principles is illustrated below using a proposal from Congressman Israel who left the Congress last year. I hope you'll consider using the principles if you're analyzing or commenting on tax proposals. Another benefit of using the principles is it can make discussions of tax reform more objective and focused.

What do you think?

++++++++++++++++++++++++
H.R.5381 (114th Congress)- College Preparation Tax Credit Act – This bill would add new Section 25E, Credit for college preparation expenses, to allow a credit of up to $500 for qualified college preparation expenses. The credit would be available via election for up to three years.
Criteria
Does the proposal satisfy the criteria? (explain)
+/-
Equity and Fairness
As credit, the benefit is the same regardless of income level. Thus, some vertical equity is achieved that would not exist if the benefit was instead a deduction that would provide a greater tax savings to higher tax bracket individuals. The credit is not refundable so provides no benefit to individuals who do not owe any tax although they may have a greater need for the assistance with college prep costs.
+/-
Certainty
The definition of college prep expenses might not always be clear. For example, might gymnastics coaching help if there is a scholarship prospect?

Convenience of payment
The benefit of the credit won’t be received until the taxpayer files their tax return. For individuals who need the subsidy provided by this credit in order to obtain the college prep service, the timing is not convenient.
-
Effective Tax Administration
The addition of a new rule requires the IRS to issue guidance and develop procedures to ensure proper compliance, such as new tax forms and verification.
-
Information Security
One possible compliance measure for administration of the credit could be that the taxpayer identification number of the provider of the college prep service must be reported by the taxpayer claiming the credit. This lead to an increase in identity theft as more people obtain another taxpayer’s TIN.
-
Simplicity
The credit will require guidance to define relevant terms, how to make the election and how to ensure the credit is only claimed for no more than three years.
-
Neutrality
The credit provides a preference for college prep costs relative to other post-secondary education needs such as occupational training and related applications. The credit might cause providers of college prep services to increase their fees.
-
Economic growth and efficiency
The proposal may increase the number of providers of college prep services. To the extent the credit results in greater spending in this area, spending in other areas (or savings) are reduced.
+/-
Transparency and Visibility
Taxpayers are likely to know about the credit as providers of college prep services will promote the credit.
+
Minimum tax gap
Without some type of verification, some individuals with high school age children might claim the credit beyond spending on college prep services.
-
Accountability to taxpayers
Is this legislation needed? What is the purpose? What data was reviewed? Why is it proposed to be part of the tax law rather than provided in another manner, such as via a needs-based grant or scholarship?

Appropriate government revenues
Sufficient data likely exists for a reliable estimate of the amount of reduced government revenues from the proposed credit.



Wednesday, April 26, 2017

President Trump's 1-page Tax Plan

White House Photo of 4/26/17 Release of Trump Tax Plan
Today, members of President Trump's cabinet (Secretary Mnuchin and National Economic Director Gary Cohn) released a 1-page list of items he wants in a tax reform plan.  CNN has the 1-pager posted here

A few observations (I'll have more later):

The plan is quite similar to what Trump talked about and had posted on his website during the presidential campaign. 

The plan doesn't say how tax rates will be lowered for everyone in a revenue neutral manner.  While the expectation underlying the proposals is that economic growth will occur to generate more revenue, that's not an exact science.  If "rosy" projections are made, fewer deductions, exclusions and credits have to be cut back to "pay for" the lowered rates. If a more conservative projection is computed, more tax breaks have to be eliminated or cut back. 

During the campaign his individual tax reform plan matched the House Republican plan for the individual rate structure - 12%, 25% and 33%.  This plan always seemed a bit odd as a tax cut to sell to the public because today, the lowest rate is 10% (and the highest is 39.6%). We don't know where brackets start and end though.

The rates in today's release are 10%, 25% and 35%.  So, it seems that the Administration realized that it might be hard to sell a tax cut on the premise that the lowest rate today is increased.  And, perhaps he is listening to Treasury Secretary Mnuchin who had indicated top rates should not be lowered, as President Trump's new plan says the top rate would be dropped to 35% rather than to 33% (see story from CBPP).

More later.

What do you think?


Sunday, April 23, 2017

Idaho Keeps Sales Tax On Groceries

Many states exempt groceries from sales tax per the premise that food is a necessity of life. This is a poorly targeted exemption though in terms of helping low-income taxpayers. Higher income individuals spend more on food so get the bulk of the tax savings. If instead, groceries were taxed, tax relief could be better targeted to the taxpayers who need it via a refundable income tax credit based on income.

Idaho subjects groceries to sales tax, but offers a grocery credit on the personal income tax returns. The only variation in the amount of the credit is that it is $120 per year rather than $100 if the individual is age 65 or older. So, it is poorly targeted and includes the out-dated assumption that senior citizens have financial needs (not all do).

Recent legislative activity in Idaho called for repeal of the sales tax on groceries. The governor vetoed this effort due to the revenue loss and the fact that a refundable income tax credit exists to reduce the burden of the tax.

I have more in this blog post at SalesTaxSupport.com.  Please take a look.

What do you think?  Should all states tax groceries and provide a refundable income tax credit based on need?  Many states already provide an Earned Income Tax credit, so low-income individuals are already filing in most states even if they owe no personal income tax.