Tech observation in President's FY2020 budget proposal for IRS

President Trump released his FY2020 budget proposal on March 12. [A Budget for a Better America – Promises Kept. Taxpayers First, page 82] It slightly increases IRS funding to “expand and strengthen tax enforcement.” Such efforts “are estimated to generate approximately $47 billion in additional revenue at a cost of $15 billion, yielding a net savings of $33 billion over 10 years.  The Budget also includes several proposals to ensure that taxpayers comply with their obligations and that tax refunds are only paid to those who are eligible, including:  improving oversight of paid tax preparers; giving IRS the authority to correct more errors on tax returns before refunds are issued; requiring a valid Social Security Number for work in order to claim certain tax credits; and in-creasing wage and information reporting.”

The budget also notes that there is $290 million for the IRS’ multiyear effort to modernize its IT. The report notes that while about 90% of individuals file electronically, most other interactions between the IRS and taxpayers is via the mail, “which slows the resolution of issues.”

That is a true and interesting observation. 89% of individuals e-file there return. Yet other interactions with the IRS will be by phone or the U.S. Post Office. Will IT modernization include taxpayer accounts where taxpayer not only pay their taxes but can also change withholding, make estimated tax payments, amend their return, etc.?

Today, March 13, the IRS issues a news release that $1.4 billion is waiting to be claimed by individuals who have not yet filed their 2015 returns! [IR-2019-38] If tax compliance were done virtually, with the IRS using data it has, the filing could be done automatically and refunds issued to bank accounts. Or at least the IRS could more easily reach taxpayer via a text message, for example, to let them know they need to file and are likely owed a refund.

What do you think?

House Budget Plan and Tax Reform

House Budget Plan

Speaker Ryan's email message and blog post today notes that the House Republican budget plan "paves the way for transformational tax reform." The Budget Committee has a markup session this morning. When Speaker Ryan tours the New Balance factory in Massachusetts on July 20 he will "promote the historic tax reform plan currently being developed by the House, Senate, and Trump administration." [7/17/17 press release] 

Here is what's in the 63-page budget plan released in July, Building a Better America – A Plan for Fiscal Responsibility, related to tax reform [page 22]:

• The FY18 budget resolution “instructs the Ways & Means Committee to produce deficit-neutral tax reform legislation that will reduce tax rates and simplify the tax code to boost economic growth.” 
• The budget plan presents the following reasons to simplify:

·   “Individuals, families, and employers spend more than an estimated 8.9 billion hours and $409 billion a year navigating its labyrinth of special rules, deductions, and tax schedules.”

·   Over 5,800 changes have been made to the IRC since 2001.

·   Tax breaks in the Code cost $1.4 trillion/year while tax collections are about $1.5 trillion.

• A corporate rate reduction is desired to promote competitiveness.
• Ways and Means Committee should develop “specific policies” for “deficit-neutral, fundamental tax reform that:

·  "Simplifies the tax code to make it fairer to American families and businesses and reduces the amount of time and resources necessary to comply with tax laws;

·   Lowers tax rates for individuals and consolidates the current seven individual income tax brackets;

·   Repeals the Alternative Minimum Tax;

·   Reduces the corporate tax rate; and

·   Transitions the tax code from a “worldwide” system to a 'territorial' system.”

A few observations:

• When will the tax reform plan be released and will it be an outline or legislative language?
• Will there also be a lower rate for business income of entities not operating in the corporate form? The House Republican blueprint of June 2016 said yes (page 17, 23 and 27), the budget plan is silent (but brief).
• Will the border-adjusted tax and consumption tax aspects of the June 2016 House Republican blueprint be part of the plan?  Speaker Ryan's press release about visiting New Balance's factory stresses that it's an American factory.
• How will lower rates be addressed with base broadeners for revenue neutrality?
• Will there be distributional neutrality?
• Will there be hearings once there is legislative language? This question was asked by Senator McCaskill at the 7/18/17 Senate Finance Committee hearing. Chairman Hatch said he wasn't sure - he would like to have hearings, but could not guarantee it. Senator Hatch also noted that they were having a hearing right now, to which Senator McCaskill noted that they were not discussing an actual bill. Her questions start at about 2:02 hours into the hearing. All four witnesses - former Assistant Secretaries of Tax Policy at Treasury answered her question that "yes" bipartisan legislation would be good. For the Tax Reform Act of 1986, there were over 100 days of public hearings, markup, subcommittee meetings, and conference meetings (see pages 1 - 4 of General Explanation Of The Tax Reform Act of 1986, (H.R. 3838, 99th Congress, Public Law 99-514 (Bluebook)). That's a lot of hearings. Of course, not all likely were on legislative language. 

What do you think? Will we see tax reform this year? How transformational do you expect it to be?

Republican Budget Plan and Tax Reform Mystery

http://budget.house.gov/UploadedFiles/PathToProsperityFY2012.pdf

 The House Budget Committee released the Republican Budget plan this week. It addresses tax reform as described in this summary from their report:

"Prevents President’s tax increases; Reforms broken tax code to make it simple, fair, and competitive; clears out special interest loopholes and lowers everybody’s tax rates to promote growth."

What does that mean? Well, there are a few more details on page 15of the report - The Path to Prosperity:

"5. Enact Pro-Growth Tax Reform

This budget recognizes that the nation’s fiscal health requires a vibrant, growing private sector. It charts a prosperous path forward by reforming a tax code that is overly complex and unfair.

Individual tax reform: The current code for individuals is too complicated, with high marginal rates that discourage hard work and entrepreneurship. This budget embraces the widely acknowledged principles of pro‐growth tax reform by proposing to consolidate tax brackets and lower tax rates, with just two rates of 10 and 25 percent, while clearing out the burdensome tangle of loopholes that distort economic activity.

Corporate tax reform: American businesses are overburdened by one of the highest corporate income tax rates in the developed world. The perverse incentives created by the corporate income tax do a lot of damage to both workers and investors, yet the tax itself raises relatively little revenue. This budget improves incentives for job creators to work, invest, and innovate in the United States by lowering the corporate rate from 35 percent to a much more competitive 25 percent and by shifting to a territorial system that will ensure a level playing field for American businesses."

There is a tax reform chapter starting at page 57.  But, still not many details.  The report does say that the tax system should be changed from a worldwide to territorial system, and AMT would be repealed. on page 67 it says that tax subsidies should be eliminated.The report correctly labels the subsidies as spending through the tax law.

It is difficult to really know what all of this means because there are few specifics and it makes reference to "loopholes" when the author likely really means special tax rules that are being used as intended, such as the home mortgage deduction, child credit and exclusion for employer-provided health insurance.

We should be asking questions when such general proposals are offered without sufficient detail to know who total revenue collections will change, how tax burden among different income groups would change, how different types of business entities and different types of income will be taxed, and what happens to federal taxes other than the income tax. What tax subsidies will be eliminated?  Many people aren't even aware of most of them, such as the exclusion for employer-provided health insurance, the imputed value of owner-occupied housing (including in the Administration's list of tax expenditures), fringe benefits, charitable contributions, state income and property taxes, and more.

It is important to read the few words used carefully. For example, the statement towards the start of this post says everyone's rates will be lowered. That is not the same as everyone's taxes will be lowered. Many individuals will have a tax increase because even with a lower rate (perhaps), your taxable income will be higher due to the removal of all or some significant number of tax breaks. I am not saying that is a bad thing, just pointing out the difference between a lower rate and lower taxes.

I think the big idea is good - a tax system with a broad base and low rates is more likely to meet principles of good tax policy, but I am concerned that the real action will be delayed because of the lack of specifics and insufficient effort to help the public understand today's tax system including its 250 tax expenditures (special tax rules). I hope lawmakers are working on legislative language so we can get a better sense of what the changes are. Ideally, it would be best to start with specific goals for the reform so there is something to measure the proposals against.

What do you think?