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Friday, June 19, 2009

Tax cuts versus smaller deficits and a better tax system

A few days ago, the Joint Committee on Taxation released its revenue estimates (JCX-28-09; 6/10/09) of President Obama's FY 2010 revenue proposals. There are some very expensive items in the plan, such as the following estimates for a 5-year period:

Permanent AMT relief (the "patch") $177 billion
Broaden and make permanent the Making Work Pay Credit $217 billion
Broadened Hope scholarship credit (renamed American Opportunity credit) $18.5 billion

And there is more. While there are some offsets, such as $91.7 billion generated by limiting the tax benefit of itemized deductions to 28% for those with income above $250,000, the net effect of the proposals is $1.1 trillion of deficit spending over 5 years!

Is the 21st century supposed to be so expensive?

The AMT fix is needed because otherwise, millions of middle income individuals who were never supposed to pay AMT will owe it. The Making Work Pay Credit is intended to alleviate some of the regressivity of social security taxes.

But - what about improving the system rather than continuing to tweak it - particularly when some of the tweaks are costly. For example, better changes would include;
  • Reviewing all of the numerous deductions and credits and eliminating ones that are really not needed. Perhaps these changes would enable the AMT to be repealed rather than just patched.
  • Expanding the earned income tax credit rather than create (or make permanent) a credit with the same goal. The MWPC adds complexity for some individuals by causing too little to be withheld from their paychecks because the tables are adjusted for the MWPC but not all individuals are eligible for the credit.
  • Simplifying the education tax provisions by not having so many. They also need to be better targeted. Consideration should really be given to why these items are in the tax law rather then just enabling the Dept of Education to determine who should get education assistance.
  • Rather than capping the tax benefit of all itemized deduction, why not reduce or eliminate the ones that make no sense. That is, why cap someone home equity debt or mortgage interest on their second home to 28% when there is no good reason to even have these deductions in the law.

Obama formed a Tax Reform Tax Force (President Bush had an Advisory Panel on Tax Reform) to look at simplification, reducing the tax gap and reducing corporate loopholes. Their report is due 12/4/09. What will they say about Obama's revenue proposals or how will they fit within any proposals?

What do you think? Should we be enacting tax system changes that will increase the deficit by over $1 trillion over the next 5 years?

1 comment:

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