SFC Blank Slate Project 2013 - Senator Rockefeller's Suggestions

Senator Jay Rockefeller

 

Evaluation of Senator Suggestions for the Blank Slate Project

As noted in my 9/6/13 post, I'm going to summarize and analyze proposals senators offered to the Senate Finance Committee, and that the senator made public. Despite falling behind on my project, as tax reform likely heats up in 2014, I'm back at it as I'd like to look at and share what might be a broader array of proposals and issues.  In no particular order, the second set of suggestions I'm commenting on are from Senator Rockefeller (D-WV) (7/26/13 letter). Senator Rockefeller is a member of the Senate Finance Committee.

	Explanation
Key tax policy principles:
Equity and fairness	Require “the wealthiest individuals and businesses to contribute more.”
Simplicity	Not mentioned.
Neutrality	Not mentioned.
Transparency	Not mentioned.
Tax gap minimization	Not mentioned.
Specific tax preferences to be repealed	None mentioned.
Specific tax preferences to be retained	Suggests expanding refundable credits such as the EITC, Child Credit, American Opportunity Tax Credit and the Saver’s Credit.
New tax provisions suggested	None specifically mentioned, but suggests the need to have wealthiest pay more and to have tax reform generate revenue. He refers to his June 2011 proposal that would raise $1 trillion and suggests the SFC consider some of these proposals (without mentioning any specific ones). See my 7/6/11 blog post for details of his 2011 proposal.
Other tax items	None specified, but there are 18 in his June 2011 proposal (see link above).
Non-tax suggestions	None noted other than generating revenue from tax reform.
"Theme"	Reduce income inequality.

 

Commentary: Senator Rockefeller refers to data from the Pew Charitable Trusts and the OECD, that the poorest 20% of individuals are doing worse than prior generations. Per the OECD, “the United States ranks 31 out of 34 developed countries in income inequality.” I think he raises a good point. There is a very wide range of income levels in the U.S. IRS data for 2009 on the top 400 individuals in terms of income indicates that the average AGI for this group was $202 million!  There are 89 in this group without wage income, while only 12 did not have capital gains subject to preferential rates. The average subject to preferential rates was $99 million of capital gains. That is a lot of income taxed at 15% which is lower than the total payroll tax rate (15.3%). While we often hear complaints from some lawmakers and citizens about the roughly 50% of lower income individuals not paying federal income tax, this group mostly have income below $50,000. Why don’t we hear more about the almost $5 million each of the top 400 individuals saved by having a 15% capital gains rate in 2009 rather than 20% (or the $12.87 million each saved if we instead still had the 28% capital gains rate that was in effect from 1987 to 1996)?

Bottom Line: I’m glad Senator Rockefeller raised the equity issue as I think it needs to be discussed. I wish he had said more about the amount of taxes each income quintile group pays as a percentage of their income as that also shows the heavy burden the lowest quintile faces. In discussing equity, we should look not only at federal income taxes paid, but also payroll taxes and other federal taxes (excise, estate, and gift).

What do you think?

 

btw - the first blank slate proposal I analyzed in September 2013 was from Senator Cantwell.

SFC Blank Slate Project 2013 - Senator Cantwell's Suggestions

Senator Cantwell

Evaluation of Senator Suggestions for the Blank Slate Project

As noted in my 9/6/13 post, I'm going to summarize and analyze proposals senators offered to the Senate Finance Committee, and that the senator made public.  In no particular order, the first set of suggestions I'm commenting on are from Senator Cantwell (D-WA) (7/26/13 letter). Senator Cantwell is a member of the Senate Finance Committee.

	Explanation
Key tax policy principles:
Equity and fairness	Noted in terms of allowing all itemizers to permanently deduct state income tax or sales tax.
Simplicity	Mentioned, but nothing specific.
Neutrality	New or modified tax incentives would affect taxpayer behavior.
Transparency	Not mentioned.
Tax gap minimization	Not mentioned.
Specific tax preferences to be repealed	None specified, but perhaps implied in suggestions to make the tax law more fair and to have appropriate transition rules.
Specific tax preferences to be retained	Make choice of deducting sales tax rather than income tax permanent.
New tax provisions suggested	1) "tax credits to promote apprentice programs and better train the American workforce" 2) "new ways to promote retirement savings"
Other tax items	1) Create a Financial Transactions Tax equal to "1/100th of a percent per trade." 2) Sufficient funding for IRS. 3) Appropriate transition rules.
Non-tax suggestions	1) End sequestration. 2) Health care reform to "focus on better outcomes for health care services, community based care, and transparency in drug pricing." 3) Carbon auction system as stick along with carrots to encourage energy innovation.
"Theme"	Innovation and job growth to improve the economy and budget.

Commentary: Senator Cantwell wants tax incentives to better train the workforce. That might also make the system more complex and less fair. On the other hand, it could address current inequities that favor college education rather than other forms of education, such as the apprentice programs Senator Cantwell suggests. Why not have the American Opportunity Scholarship Credit or Hope Scholarship Credit apply to any education following high school? But why not leave these items outside of the tax system and let the system already in place of Pell and similar grants work? Those system already measure financial need (the FAFSA form) and can deliver the benefit when needed - when tuition is due (rather than when you get your tax refund). 

Looking for cost savings is always a good idea, so health care reform looking at costs savings is a good idea. Appropriate funding for the IRS to do its job is wise. Funding and new reporting obligations that can help reduce the $450 billion annual tax gap would help achieve revenue neutrality in tax reform and make the system more equitable. A carbon auction system is worth exploring, particularly if this will be more common throughout the world, but I don't think it has to be part of tax reform (unless a carbon tax is going to be considered).  I'd wait on the Financial Transactions Tax. Fix the federal tax system first. Then, if revenue is still needed to help pay down the debt, explore new revenue options, but weighed against raising the income rate or that of other existing taxes as appropriate.

Bottom Line: I like the focus on innovation and job growth beyond only thinking about a college education. On her website, Senator Cantwell states: "In the Information Age, we need a tax code that rewards efficiency and innovation." As you can guess from the name of my blog (21st Century Taxation), I like the recognition that the world has changed and our tax system needs to be updated to reflect today's ways of living and doing business.

I'd like to see specifics on deductions, exclusions, credits and special rate structures to reform (including eliminate). For example, why not cut back the expensive exclusion for employer-provided health care and use some of those funds to improve the health care system for everyone?

What do you think?

 

Senator submissions for the "blank slate" tax reform project - Introduction

On June 27, 2013, Senators Baucus and Hatch of the Senate Finance Committee called upon their colleagues to provide suggestions for which special tax rules should remain in or be added to a reformed federal tax system. Comments on this "blank slate" approach were to be submitted by July 26, 2013. To help encourage participation, it was later announced that there would be no linking of any proposal to any senator until 50 years later (The Hill, "Tax writers promise 50 years of secrecy for senators' suggestions," 7/24/13). Of course, senators could release their letters to the public on their own. Several senators have done so. But, with the promised secrecy, we likely won't know how many senators provided letters with justifications for provisions to be retained.

The Committee for a Responsible Federal Budget has a list with links to the submissions they are aware of - "Opening the Tax Reform Vault."

What do the submissions suggest?  More incentives? Specific ones to repeal?

I'm going to take a look at a few in this and future blog posts to get a sense of what members of the Senate Finance Committee might learn from the letters released publicly by Senators.  I'll aim to use a common format to help with comparisons and understandings. I will consider if key principles of good tax policy were considered, note any specific preferences suggested for repeal or addition, and provide an overall assessment. 

I hope you'll comment on both the Senator's letter and my overall analysis of each.

Stay tuned!  (In no particular order, I'll start with Senator Maria Cantwell (D-WA) - in the next post.)