More Overlooked but Needed Tax Reforms

Continuing with my list of reforms I think would help our tax system (see prior lists of 8/29/21 and 6/21/21), here are three more.

1. Consolidating education provisions further. Need to better identify purpose of these provisions and if their “cost” is appropriate and in line with direct spending such as Pell grants.

2. If higher education incentives are retained, be sure they also cover post-secondary trade schools and only for reasonable costs.

3. Make the IRC gender neutral – “his” is often used in the Code, sometimes even to describe a business (such as at §446(a)). Also, references to husband and wife should be changed to spouses.

Examples:

• §213 – Medical, dental, etc., expenses. (a) Allowance of deduction. There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the extent that such expenses exceed 7.5 percent of adjusted gross income.
• §446(a) – General Rule. Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.
• §7701(a)(17) defines “husband and wife”.
• §121(d)(1) – “If a husband and wife made a joint return for the taxable year of the sale or exchange of the property, ….”

While Rev. Rul. 2013-17 suggests a gender-neutral reading of the Internal Revenue Code, changes have not been made throughout.[1] This ruling was obsoleted by TD 9785 (9/8/16), adding Reg. 301.7701-18 defining spouse, husband and wife, husband, wife and marriage. No changes are made to the Code or other regulations to make them gender neutral.

H.R. 3833, Equal Dignity for Married Taxpayers Act of 2021, proposed to make numerous changes to the IRC to, for example replace “himself” with “self” and “husband and wife” with “married couple.” It would also repeal §7701(a)(17) that defines “husband and wife” and modify §7701(a)(38) that defines “joint return” to say it is by a “married couple” rather than a “husband and wife.”

There should also be a requirement to update regulations.

#letsfixthis

What do you think?

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[1] For example, Rev. Rul. 2013-17 states: “consistent with the statutory context, the Supreme Court’s decision in Windsor, Revenue Ruling 58-66, and effective tax administration generally, the Service concludes that, for Federal tax purposes, the terms “husband and wife,” “husband,” and “wife” include an individual married to a person of the same sex if they were lawfully married in a state whose laws authorize the marriage of two individuals of the same sex, and the term “marriage” includes such marriages of individuals of the same sex.”

Income inequality, education and taxation

A recent blog post from The Tax Foundation (3/16/12) points out - "Census Data Shows Inequality Linked to Education, Not Taxes."   For years, data has shown that college grads tend to make a lot more annually than do those without a college degree.  But whether that means that taxes are completely innocent for the college versus non-college earnings situation doesn't tie for me. I raise the issue here of whether some of the government spending decisions, including the structure of tax expenditures (special tax rules), supports inequities that may make it more difficult for low-income individuals to get to college and to complete a college degree.

Some examples:

• The American Opportunity Tax Credit provides up to a $2,500 tax credit annually for each of the first four years of college for a student (so $10,000 tuition and expense assistance in total). This special tax rule is not available to all taxpayers because there is a phase-out provision. But that phase-out provision doesn't start to kick in until a fairly high income level - $160,000 for a married couple (no credit available once their income exceeds $180,000).  At this level of income, the couple is unlikely to qualify for a needs based college scholarship for their child.  We often hear that there is insufficient funding for Pell grants. So why are we giving government dollars (that come from all taxpayers) to people who don't really need it? (see my 3/22/11 post)
• Some (including me) would argue that our current charitable contribution rules are too generous.  There are a few examples, I'll share one tied to this education and tax topic.  I often hear from friends that the PTA or Home & School Club at their child's public school tells them they are expected to "donate" a certain amount based on how many kids they have attending the school. Under our existing tax law, this is a deductible charitable contribution.  The money is used for your kid's education. If they were at a private school, the amount would not be deductible. Let's eliminate charitable contribution deductions to schools your child attends.  This would raise more revenue that could be used to help schools where parents can't afford to donate money, for example.
• Another inequity tied to donating money to schools (or anywhere) is that as a deduction, it is an "upside down" subsidy in that it provides a greater benefit/subsidy to higher income individuals. For example, two people donate $2,000 to ABC Elementary School (or any charity). One donor is in a 20% tax bracket and the other in a 35% tax bracket. The 20% bracket donor is out of pocket $1,600 after taxes, but the higher income donor is only out of pocket $1,300. Changing the deduction to a credit would make this more equitable. It could also be cut back to enable federal and state governments to have more revenues to help address inequities in educational opportunities.
• Another area for modifying charitable contribution deductions is to reduce the deduction (or ideally credit percentage - see prior bullet point), is to have categories of donations. Some donations are made to entities with billions of dollars, such as some private college endowments. We are all funding getting more into these rich coffers due to the tax deduction. This could be cut back and revenues used to improve educational opportunities for those in need.

This is just a few examples of how the tax law contribute to enabling or supporting inequities that help continue income inequalities. The examples above tie to education but there are other inequities in the tax law which, if addressed, could generate funds to help reduce educational opportunity inequities that can help reduce growing income inequalities.

What do you think?