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Friday, December 26, 2008

Transitional Issues Identified by GAO - Where is taxation?

The GAO has a website with lots of information on transitional matters for president-elect Obama and the 111th Congress. It is interesting that there is not much mention of taxes as a top priority. Click here for the link to the GAO's home page for the transition. In the far right of that page you'll see a list of these "urgent" issues:
  • Financial Institutions and Markets
  • Iraq, Afghanistan, and Pakistan
  • Protecting the Homeland
  • Defense Spending
  • Improving U.S. Image Abroad
  • The 2010 Census
  • Care for Service Members
  • Preparing for Public Health Emergencies
  • Food Safety
  • Surface Transportation
  • Retirement of the Space Shuttle
  • Transition to Digital TV
  • Defense Readiness

GAO notes that "these issues are not necessarily the most important issues in the long term, but rather those that must be dealt with immediately."

Are there any urgent tax issues? Yes. But perhaps they are not emergencies, particularly since most have been known about for some time or are recurring, such as the need for an annual AMT "patch" to keep millions of individuals from owing AMT who were never supposed to be subject to this tax. Also, there are a few tax topics for which GAO has indicated it will be issuing reports and notes a few areas, such as the tax gap, where it has already suggested ways to address the problem. First, these GAO topics.

The GAO's upcoming reports on national issues includes these topics that might include tax matters (click here for complete list):

  • strategy for energy needs
  • addressing climate change
  • assuring retirement security income
  • fiscal challenges of state and local governments

Under "major cost-saving opportunities" the GAO notes its reports addressing the tax gap.

Under issues by agency, GAO notes the following for the Treasury Department:

  • Efficiently Managing and Overseeing the Troubled Asset Relief Program
  • Re-examining Tax Policies and Priorities
  • Reducing the Tax Gap
  • Modernizing Business Systems
  • Implementing Debt Relief
  • Ensuring Retirement Income Security

There are a few excellent reports on tax reform under "Re-examining Tax Policies and Priorities." Key points include:

  • rates should be lowered and the base broadened to make a tax more equitable

  • tax preferences should be reduced to make the income tax system simpler, more transparent and to improve compliance rates

Fortunately, the GAO continues to highlight the upcoming fiscal crisis (click here) - noting that the "current fiscal policy is unsustainable over the long term. Absent reform of federal retirement and health programs for the elderly--including Social Security, Medicare, and Medicaid--federal budgetary flexibility will become increasingly constrained. Assuming no changes to projected benefits or revenues, spending on these entitlements will drive increasingly large, persistent, and ultimately unsustainable federal deficits and debt as the baby boom generation retires."

While there are many high priority issues awaiting the new president and Congress, the list should include some tax matters. Here are some suggestions:

  1. Income tax reform that will address AMT problems and expiring tax cuts. Continuing to pass a year end one-year AMT "patch" is not the way to go. It doesn't solve the ongoing problem and individuals still need to include AMT in their estimated tax payments as there is no guarantee that a year-end patch will be enacted. The fix is expensive. It costs over $60 billion just for a one-year patch! Reform should be done in conjunction with addressing the 2001/2003 temporary tax cuts that expire after 2010. Congress and the president need to decide early in the 111th Congress what cuts will remain and which won't. The costs of keeping any and permanently keeping millions of individuals out of AMT, should be done with restoring tax rate increases for higher income individuals, not letting the estate tax expire in 2010, eliminating inequitable tax deductions, exclusions and credits, and incorporating any "economic stimulus" into the entire package (rather than issuing checks to some individuals as was done for the last economic stimulus package).

  2. Continuing to work on finding a way to permanently eliminate the AMT. This extra, alternative tax violates many principles of good tax policy including simplicity and transparency. For more reasons - click here.

  3. Reducing the corporate income tax rate and broadening the base. This will improve competitiveness with businesses located in other countries, reduce complexity and hopefully help the economy.

  4. Reducing the tax gap. There are many proposals, particularly from the GAO. Unfortunately, the current budget system really doesn't encourage reducing the gap - oddly enough. Under PAYGO, tax cuts need offsetting tax increases and tax gap measures work here. But to pass a bill with just tax gap remedies, would be a revenue raiser and I think many members of Congress (and perhaps the President) will not want to "waste" tax increases that have no offsetting tax reductions. Odd as that may seem. Lately, we've just seen isolated tax gap measures, such as basis reporting by brokers, tacked onto costly bills. For more, see my short article on the slow approach to closing the tax gap (here). Tax gap reduction efforts need to focus on the areas of greatest non-compliance - cash transactions of small businesses.
  5. Modernize retirement plans. Defined contributions plans are the reality for most workers. Thus, workers need financial literacy. Also, ALL workers must have access to retirement savings options regardless of whether their employers offer plans or how many times they might change jobs. Here is one proposal - the first time an individual gets a paycheck or files a Schedule C, the IRS sends information on retirement savings. Ideally, an account is also set up for that worker and the government deposits $500 into it as a start. Also, knowing that you'll get this retirement account deposit will encourage more individuals to be tax compliant from the start of their tax filing obligation life. After the initial deposit, employees indicate on their W-4 how much they want deposited from each paycheck. Individuals entitled to the earned income tax credit (EITC) will have a set percentage of it deposited into their retirement account. If the IRS computers find contributions of $0 or below a certain percentage of earnings, a letter should be sent to the worker to inform them of the importance of depositing funds into their retirement account regularly through the payroll withholding system (that is, their employer withholds the amount and sends it to the government). Enticements for employers to supplement employee contributions should also be enacted. Greater financial literacy education is needed in K-12 and through community and employer groups.
  6. Helping states collect taxes. For years, proposals to update the almost 50-year old Public Law 86-272 on when a multistate business may be subject to state income tax and proposals to allow states (under specified circumstances) to collect sales tax from remote vendors, have gone nowhere. It is past time for Congress, state tax administrators and businesses to work together to come up with viable and modern solutions to bring rationality to multistate tax assessment and collection.

What do you think?

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