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Friday, January 1, 2010

Happy New Year 2010! Time to address tax problems.

Thank you for reading this blog in 2009 and I hope you'll continue and that you'll post replies. Also, if you have a short paper on a realistic idea for improving and modernizing federal or state tax systems or one that describes a tax problem, that you'd like me to post on the blog - please let me know.

If we look at the past decade (2000 - 2009), there have really been more problems for tax systems than improvements. This leaves a lot of work for the next decade. Consider:
  • Congress is not ready to deal with expiration of the 2001 and 2003 tax cuts as evidenced by not acting to keep some version of the estate tax for 2010.
  • The tax gap continues to be a serious problem (over $345 billion goes uncollected at the federal level annually). Yet, solutions are typically only enacted as revenue raisers for other bills. And these solutions do not address the biggest parts of the gap - sole proprietors and complexity. [see 2008 article on this]
  • Complexity grows. The temporary provisions of the American Recovery and Reinvestment Act of 2009, some of which may become permanent just add more rules, definitions and effective dates. Nothing has been truly simplified.
  • Who should pay? Lately, it seems that we want millionaires to pay for everything. The Tax Foundation issued a report in 2009 that notes that tripling everyone's tax rate still won't solve the federal deficit problems. I think that growing income gaps should lead to governments to analyze whether more brackets in the higher levels of the income tax rate structure make sense (for example, lumping together the group over $150,000 is likely too low of a point to lump high earners), but it won't solve all problems. Also, such high rates are unattractive to businesses. There are other ways to get higher income taxpayers to pay "their share" (such as reduce unnecessary tax subsidies (such as $1.1 million dollar mortgage deductions) and stop exempting utilities from sales tax)).
  • Growing and continuing state budget deficits. Tough times often lead to unfortunate tax changes such as rate increases which may make tax systems more inequitable (such as the sales tax rate increase in California which only taxes tangible personal property so omits most types of consumption). Tax systems usually are more likely to meet principles of good tax policy if bases are broad and rates are low.

What do you think legislators need to do to improve tax systems for 2010?

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