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Wednesday, February 24, 2010

Wyden-Gregg Bipartisan Tax Fairness and Simplification Act

As promised, on February 23, Senators Wyden (D-OR) and Gregg (R-NH) introduced their tax reform proposal called the Bipartisan Tax Fairness and Simplification Act of 2010. They have a webpage with the full text of the 186-page legislative proposal, summaries and even a sample 1-page tax form for individuals.

I look forward to reading the 186 pages in detail as there are several intricacies involving retirement savings accounts and lifetime savings accounts (sounds a bit like what President Bush's Advisory Panel on Tax Reform proposed in 2005) and a few other areas to delve into to see what they truly offer in terms of simplification and if they are equitable.

Some general observations:
  1. Consumption tax or income tax? It seems to be a mix of a consumption and an income tax in that more small businesses can expense assets including inventory, individuals have savings deductions, but there are also deductions for mortgage interest and charitable contributions and credits for child care.
  2. Where is the discussion of how progressive an individual income tax should be? Individuals would have 3 graduated rates of 15%, 25% and 35% with the 35% rate kicking in at $140,000 of income (for MFJ). This seems to be a significant tax rate cut (compared to 2011 and beyond) for high income individuals who otherwise would face a 39.6% rate (but starting at higher than $140,000). Why not recognize that $140,000 of income (at least in Silicon Valley and a few other areas) is not "rich." A recent article on the super rich (based on IRS data) noted that the average income for the 400 "wealthiest" (apparently meaning those with the highest income) was $345 million in 2007. The article notes that while their income has increased, their tax obligations have dropped. Given widening income gaps, it seems odd for a "progressive" income tax plan to cap the top rate at $140,000 of income and for such individuals to be taxed at the same top rate as those making over $100 million (or even over $400,000). NOTE - the changed capital gain structure to exclude 35% of the gain will cause high income taxpayers to have a higher capital gains rate than under current law, but it would still be nice to have the discussion of how progressive the tax system should be and to leave behind the notion that today, "high income" justifying application of the top rate means over $140,000 of income for MFJ.
  3. True simplifications: There are some in the Wyden-Gregg proposal including repeal of the individual AMT, repeal of phase-outs of itemized deductions and personal exemptions, and repeal of a deduction for miscellaneous itemized deductions (although it would be nice to see some allowance for deduction of unreimbursed employee business expenses). Elimination of the phase-outs should have been accompanied by a rate increase rather than a rate decrease though.
  4. Compliance simplification: Providing a system for the IRS to prepare returns is a great idea. The IRS already has the necessary information for many wage earners. Some other countries have been doing this for years. The GAO issued a report on Alternative Filing Systems in 1996!
  5. Overlooked opportunities for simplification, transparency and equity: Just a few to note. Some higher education tax breaks are consolidated. BUT, why have any if the goal is to simplify and make the law more fair? These tax breaks make the law more complicated. The US Government already handles grants for higher education - why not just consolidate them all under the Dept of Education. That would also increase transparency because you could just look at that department's budget to see how much the government spends on higher education. Also, in the form of grants and scholarships, the higher ed assistance comes at the right time - before the semester begins, not after April 15. Also, why keep the deduction for charitable contributions? This provides a greater subsidy to higher income individuals? Why keep the mortgage interest deduction in its current form? Where is the fairness in the government subsidizing mortgages up to $1.1 million and on a second home and on home equity debt?
  6. Corporate reform: The proposed drop to a flat rate of 24% is a surprise. Because of the call for further study on what the authors call "corporate welfare" it is not entirely clear how the lower rate will be paid for.
  7. Small business: Proposed expensing of business assets including inventory if gross receipts do not exceed $1 million is a helpful simplification. The inventory one though is misleading because the IRS has been letting businesses do this for year. Revenue Procedure 2001-10 allows businesses with gross receipts of $1 million or less to use the cash method and treat their inventory as if it were supplies.
  8. One-page tax form: I'm disappointed to see this stressed as if this is the key indication that simplification has been achieved. THE SIZE OF A TAX FORM SAYS NOTHING ABOUT HOW SIMPLE OR COMPLEX A SYSTEM IS! Today's income tax can be filed on a postcard. It just depends on how much detail Congress wants the IRS to have. Take a look at the Wyden-Gregg form and the terminology used. Is it really simpler? The form is not the best way to judge simplicity. Also, simplicity is just one principle for a good tax system.

I'm glad to see the proposal as it could help get a discussion on tax reform underway. Will Congressman Rangel be reintroducing his H.R. 3970 of the 110th Congress (the "mother of all reforms")? It would be good to see tax reform being discussed in the House Ways & Means Committee. I think a better starting point would be to analyze the current system to identify its weaknesses. Applying principles of good tax policy to it is a good way to start.

And, what would it take to get major tax reforms enacted? I took a stab at that question back when Congressman Rangel introduced H.R. 3970 - here.

What do you think?


Monica Lawver said...

Thank you for keeping up on things! I love reading your updates and opinions. It's really nice to know reform efforts haven't completed stalled in the water.

Brian said...

I haven't had a chance to look at it. Does the proposal encompass the estate and gift tax? Does their proposal real the estate and gift tax?

Professor Nellen said...

Brian - sorry I forgot to note that point. The estate and gift tax is not mentioned. It remains as do employment taxes and excise taxes.

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