Today's Tax Reform Cost - How Much is $1.5 Trillion?

A budget agreement that preceded current tax reform efforts included that tax reform can "cost" up to $1.5 trillion over ten years (H.Con. Res. 71).

Key actions and votes on this resolution:

• 10/5/17 – passed in House by 219-206 
• 10/19/17 – passed in Senate by 51-49
• 10/26/17 – Senate amendment passed in House by 216-212

Also see:

·       House Budget Committee summary and explanation of 11/7/17

·       House Budget Committee news on Senate-Passed Budget Resolution (10/24/17)

Observations: 

• The passage of the budget with the $1.5 trillion for tax reform was slim in both House and Senate. What does this mean for tax reform? H.R. 1, Tax Cuts and Jobs Act passed on 11/16/17 in the House by 227-205 (13 Republicans voted against it). What might happen in the Senate?

• A $1.5 trillion deficit over ten years divided among the 325,365,000 people in the U.S. comes out to $4,610 per person or $461 per year per person.  I'm reminded of an article in The Atlantic in May 2016, "The Secret Shame of Middle-Class Americans," that almost half of Americans could not put their hands on $400 for an emergency. So, seems that not only does this sound like a lot of money, it is even when it comes down to every person (of all ages) in the U.S. 
  
• What about $1.5 trillion spread out over the 148,840,642 individual income tax filers we have (for 2015)? That comes out to $10,078 per individual filer over 10 years or $1,008 per year per individual filer.

What do you think?

Deficit Commission Co-Chairs Issue Their Draft Proposals

On November 10, 2010, the co-chairs of President Obama's Deficit Commission - Erksine Bowles and Alan Simpson released a draft of their proposal and a document showing how a variety of cuts could generate $200 billion of savings by 2015 (part of their recommendation package).

The draft (in the form of a Powerpoint presentation) starts with ten "guiding principles and values." At least two of them refer to tax changes - #7 on cutting spending includes spending in the tax law ("tax expenditures") and #9 specifically refers to tax reform. They highlight that their draft proposal "reduces tax rates, abolishes the AMT, and cuts backdoor spending in the tax code." For the area of tax reform, the co-chairs present three tax reform options.

The 10 principles and values are:

1. We have a patriotic duty to come together on a plan that will make America better off tomorrow than it is today.
2. The Problem Is Real –the Solution Is Painful –There’s No Easy Way Out –Everything Must Be On the Table –and Washington Must Lead
3. It Is Cruelly Wrong to Make Promises We Can’t Keep
4. Don’t Disrupt a Fragile Economic Recovery
5. Protect the Truly Disadvantaged
6. Cut and Invest to Promote Economic Growth and Keep America Competitive
7. Cut Spending We Simply Can’t Afford, Wherever We Find It
8. Demand Productivity and Effectiveness
9. Reform and Simplify the Tax Code
10. Keep America Sound Over the Long Run

The 3 tax reform options are:

1. The Zero Plan - highlights per the co-chairs:

• Consolidate the tax code into three individual rates and one corporate rate
• Eliminate the AMT, Pease, and PEP
• Eliminate all $1.1 trillion of tax expenditures
• Dedicate a portion of savings to deficit reduction and apply the rest to reduce all marginal tax rates
• Add back in any desired tax expenditures, and pay for them by increasing one or all of the rates from their zero-expenditure low

That really does say "eliminate all $1.1 trillion of tax expenditures"! The co-chairs suggest that doing so would allow the three individual rates to be 8%, 14% and 23% with a corporate rate of 26%. If the child credit and EITC were kept, the rates would be 9%, 15% and 24%.

2. Wyden-Gregg Style Reform

I have a brief summary of this - here.

3. Tax Reform Trigger - described as follows:

• Call on Finance and Ways & Means Committees and Treasury to develop and enact comprehensive tax reform by end of 2012
• Put in place across-the-board “haircut” for itemized deductions, employer health exclusion, and general business credits that would take effect in 2013 if reform is not yet enacted
• Haircut would limit proportion of deductions and exclusions individuals could take to around 85%* in 2015. Similarly, corporations would only take some proportion of their general business credits
• Set haircut to increase over time until tax reform is enacted

I am impressed at the boldness of the proposals as a good starting point for serious discussion of serious budget - spending and tax, issues. For example, noting what the tax rates could be with elimination of all tax expenditures should bring sunshine to the types of spending in the tax law and whether it is really needed. Elimination of all or many tax expenditures will make the tax law simpler and allow for lower tax rates.

I still need to read more and would like to see something beyond the bullet-point Powerpoint, but I think this is a good start that they are serious about highlighting that we need serious proposals to address serious problems!

Of course, it remains to be seen if the commission will be able to reach the necessary 14 out of 18 votes for consensus. But if not, the proposal of the co-chairs should be used by President Obama and the 112th Congress to get moving to resolve issues sooner rather than later because they just get harder to fix the longer we let them stay.

What do you think?

America Speaks - Our Budget, Our Economy

I had the opportunity to participate in the Silicon Valley session of the America Speaks "town hall" meeting. This was one of 19 connected meetings held throughout the US with over 3,500 people participating together. The Silicon Valley session was supported by Joint Venture: Silicon Valley Network and the Silicon Valley Community Foundation.

I was very impressed with the logistics. We all heard the organizers speaking from Philadelphia. The answers to questions we discussed at table groups were immediately input to the "theme team" in Philadelphia so that common answers could be shared. In addition, we used clickers to record answers to many questions throughout the day.

There must have been at least 100 people at the Silicon Valley location. Everyone was respectful and civil and we all seemed to have a good time - it was a well run event.

I think it was a good opportunity for people to learn about the basics of the federal budget - revenues and spending elements and the existing and upcoming shortfalls. Various options were given. While these were scripted, that was necessary if we were to get through a tough exercise in a short amount of time. But we were able to give comments on the scripted budget choices. For example, it seemed that a majority (or at least a very vocal minority) contributed that the best solution to health care would be a single-payor system (or some called it Medicare for everyone).

I think a few people were concerned that Social Security changes, such as increasing the retirement age and reducing the inflation adjustment for current payouts, were on the list of budget options. However, the reality is that when some of the largest expenditures in the budget are mandatory ones (Social Security and Medicare primarily), they can't be ignored in looking for over a trillion dollars to balance the budget. One person shared that Social Security didn't cause the problem so should not be changed. I think that is interesting (and wrong). The failure to update the Social Security rules for changes in how we live and our demographics IS a problem. When Social Security was created, life expectancy was below age 65 (see SSA page). It hasn't been that way in decades.

Addressing the problems that cause our current finances to be unsustainable are difficult. Despite having to simplify many issues, I think it was a good educational experience for everyone in terms of learning more about the budget and that we can all learn something from civil discussions.

There were two, concise and helpful documents prepared for participants:

• Budget 101
• Options Workbook

America Speaks will present the results to President Obama's Deficit Commission at their June 30 meeting. I heard a few people express concerns that that would be misleading. I think the Commission is smart enough to take it for what it is - an assemblage of over 3,000 voices with scripted options, but also written suggestions. Commission member Dr. Alice Rivlin was at the Philadelphia session and even spoke to everyone near the end. So she knows how the input was assembled.

If you participated in any of the 19 sessions and want to share a comment - please do, and note the city - thanks.

Survey Indicates Majority Not Willing to Reduce Deficits with Higher Taxes

A Rasmussen survey of 1,000 adults conducted at the end of April found that to address the deficit:

• 18% are willing to pay higher taxes
• 69% are not willing to pay higher taxes
• 13% are not sure

Men and Democrats are more willing to pay higher taxes than the total survey population.

So, a majority prefer spending cuts. I wonder what the poll results would be if the spending cuts on the table included such things as:

• shorter unemployment payment periods
• no COBRA subsidy
• no deduction for interest on home equity debt
• no deduction for interest on a second home
• no deduction for state and local taxes
• repeal or reduction of the child credit

I just list the above because I don't think people think of such spending when the word spending it used. It would be nice to hear about the type of spending people think should be cut. Unfortunately, without budget reform, one item of spending that grows is interest on the national debt.

President Obama's National Commission on Fiscal Responsibility and Reform certainly has a challenging task before it and probably isn't surprised by the survey results.

Signs of Tax System Problems - Serious Ones!

Today - tax day - among the emails I received are two that I think are good illustrations of how troubled our federal tax system has become. The system needs to be improved and updated to reflect 21st century ways of living and doing business today. Unfortunately, I see very little proposed by lawmakers that will make any of this happen.

Here are the 2 emails:

1. The Treasury Inspector General for Tax Administration (TIGTA) released a report, Interim Results of the 2010 Filing Season (4/14/10). Highlighted in the email:

"TIGTA auditors analyzed 2010 filing season results as of the first week of March, 2010. As of that time, the IRS had paid some $24.2 million in erroneous Making Work Pay and Government Retiree Credits and improperly awarded some $4.7 million in erroneous Plug-in Vehicle Credits. The IRS estimates that 50 percent of the individuals claiming the First-Time Homebuyer Credit will not attach the required documentation this year." ...

"As of March 5, 2010, the IRS had identified 119,484 tax returns with $733 million in fraudulent refunds and prevented the issuance of some 98 percent ($721 million) of those refunds."

The problem as I see it: too many law changes including ones that involve millions of taxpayers and thus lots of IRS time. And these are temporary provisions which seem to cause extra confusion and the time spend figuring them out is lost when the item expires. A tax rate decrease for low bracket taxpayers and an increase in the Earned Income Tax Credit would probably have been adequate stimulus techniques.

2. An email from Congresswoman Lofgren stating "As we mark the passage of another Tax Day, we should recap tax cuts enacted by this Congress. All totaled, more than $800 billion in tax cuts." She is my representative and I admire her work. I don't agree with the message she is sending, but I think it just illustrates that the majority of politicians and the public have come to think that the job of elected officials is to cut taxes when in fact it is to oversee budgets with appropriate spending and revenues. I don't think anyone should be bragging about $800 billion in tax cuts when our deficit is ballooning into the trillions of dollars.

The email has a link to more details from Speaker Pelosi which also brags about the tax cuts - here. Who is going to talk about the growing, staggering deficits and the increased interest expense they are causing us to pay?

AND - who is going to talk about the intersection of these two email messages? The tax cuts were not well designed and there were too many for the public and the IRS to handle which has led to an increase in the tax gap.

A better approach?
(1) Ask - do we really need tax cuts?
(2) If yes, how can they most simply and effectively be drafted? Typically, a rate decrease would be the answer or an increase in the standard deduction. Use tax rules that already exist and that people understand rather than create new complex rules that require guidance from the IRS and new tax forms.
(3) Talk more about our staggering debt and deficits. There are many tax preferences that make no sense and should be phased out as a start (such as interest expense on a second home and on up to $1.1 million of debt). Also, we should not stand by quietly while Congress and the Administration talk about re-instating the 2001/2003 tax cuts. Some lawmakers say these cuts helped create the deficits (or eliminated the budget surpluses that existed for a very short time). Why would they now want to keep some of them rather than let them expire at the end of 2010.

What do you think?

Paul Volcker Again Mentioning a National VAT

CBSMoneyWatch.com has an article today - "VAT: New Tax Coming Soon?" by Cait Murphy (4/7/10). It states that in response to a CBS MoneyWatch.com question on April 6 in NYC, Volcker said that a VAT in the US was "not a toxic idea." The article also notes that Speaker Pelosi and Senator Conrad likely support not leaving the topic off the table. This is really important because:

• Volcker advices President Obama.
• The US is the only industrialized country without a VAT (although we have state sales tax).
• A VAT can be more efficient than a sales tax and with a federal VAT, states could adopt it (at rates lower than existing sales tax) and get rid of their troubled sales taxes.
• The current income tax is unlikely to solve our deficit problems (and yes, reduced spending should also be considered in addition to tax reform). See the Tax Foundation Fiscal Facts of 3/12/10 - Can Income Tax Hikes Close the Deficit?

I've discussed this before a few times (for example, 2/8/10 post which also notes Volcker's interest in a VAT).

I think a VAT is something that should definitely be discussed at the federal level with the states participating. I'll be writing more on the issues and opportunities of this (including using materials I wrote back in the mid-1990s when major federal tax reform was a very hot topic). I do have a brief overview to how the VAT works if you are interested - here. Here is a longer paper presentation from 1999 on major federal tax reform - much of it is still relevant today although the need for reform is likely greater today than ten years ago.

What do you think?

"Broad-based consumption tax" - 21st century necessity?

The Wall Street Journal for today (Feb. 8) includes an op ed (Toward a Different Fiscal Future) by economist Glenn Hubbard who previously worked in the Council of Economic Advisers for George W. Bush. Dr. Hubbard points out the serious issues in the US budget that are not sustainable even with an income tax increase for high income individuals (who are only about 1% of the public).

One of his suggestions is for a "broad-based consumption tax." He doesn't state what this would be. I'd guess that the supporters of the Fair Tax will jump on this suggestion and say it should be the Fair Tax. Of course, that group advocates the Fair Tax as a replacement for today's income, payroll and estate/gift taxes, not as an add on. Dr. Hubbard is noting the need for an add-on due to deficits and continued spending desires as well as mandatory spending items in the federal budget. He is not the only one to suggest this. Paul Volcker has also suggested the need for a VAT (which is a broad-based consumption tax).

Does this make sense as a way to move our tax system into the 21st century? Well, yes and no.

Yes, we have deficits, growing debt and lots of spending that no one seems to want to seriously reduce or even freeze (President Obama proposes to only freeze a very small percentage of spending for three years). Someone has to pay for this. "Broad-based" means that everyone would pay. That would be true if we had a VAT. Every time you bought a good or service, you'd pay the federal VAT. If designed as a credit-invoice model that most of the rest of the world uses (in addition to income taxes), businesses would also pay VAT. However, businesses would get their VAT rebated to them. So, the VAT is a much better form of sales tax than our sales tax which businesses do have to pay, but economically and technically, should not. The consumption taxed should only be final consumption of consumers.

The typical concern raised about a US VAT is that it would be a "money machine." Opponents suggest that it would be too easy to raise the rate and generate lots of money. I don't know how true that is because this tax would affect 100% of voters (rather than the 1% affected by any tax increase on those making over $250,000) so I think it would be politically difficult to keep raising the rate. Of course, then it might be easier for legislators and the President to tell voters that the alternative to a VAT rate increase is to cut spending.

Any benefits of a VAT? I think it would really help the states because they could replace their sales tax with the federal VAT by just adding on to it. The state rates could be lower and the pyramiding that exist with the state sales tax would end. Relief to address the regressivity of the VAT could be down with refundable income tax credits (federal and state) which would avoid giving VAT breaks to high income individuals. Also, the rest of the world (mostly) uses a VAT. Perhaps there are advantages to using it, such as allow for exports to be tax-exempt and imports to be taxed.

And, yes, if spending can't be better controlled, the feds have to find revenue somewhere.

BUT, I hope that alternatives would be considered because the VAT rate would likely have to be high and would adversely affect many low and middle income taxpayers. We have a significant and growing deficit. Why are new tax breaks being added for individuals - such as the American Opportunity Tax Credit, or increases in existing tax breaks. Just as President Obama says we need to freeze spending for 3 years, we need to freeze spending that exists in the tax law.

Also, adding more tax breaks just makes the system more complicated than it needs to be.

What type of "broad-based consumption tax" do you think is appropriate, if any, at the federal level? What about the alternatives that can still help to reduce our deficit and debt?

btw - the National Taxpayer Advocate's annual report to Congress for 2009 includes a report on administrative issues of a consumption tax, such as a VAT or national sales tax (Volume II, page 35). Fortuitous?

Tax cuts versus smaller deficits and a better tax system

A few days ago, the Joint Committee on Taxation released its revenue estimates (JCX-28-09; 6/10/09) of President Obama's FY 2010 revenue proposals. There are some very expensive items in the plan, such as the following estimates for a 5-year period:

Permanent AMT relief (the "patch") $177 billion
Broaden and make permanent the Making Work Pay Credit $217 billion
Broadened Hope scholarship credit (renamed American Opportunity credit) $18.5 billion

And there is more. While there are some offsets, such as $91.7 billion generated by limiting the tax benefit of itemized deductions to 28% for those with income above $250,000, the net effect of the proposals is $1.1 trillion of deficit spending over 5 years!

Is the 21st century supposed to be so expensive?

The AMT fix is needed because otherwise, millions of middle income individuals who were never supposed to pay AMT will owe it. The Making Work Pay Credit is intended to alleviate some of the regressivity of social security taxes.

But - what about improving the system rather than continuing to tweak it - particularly when some of the tweaks are costly. For example, better changes would include;

• Reviewing all of the numerous deductions and credits and eliminating ones that are really not needed. Perhaps these changes would enable the AMT to be repealed rather than just patched.
• Expanding the earned income tax credit rather than create (or make permanent) a credit with the same goal. The MWPC adds complexity for some individuals by causing too little to be withheld from their paychecks because the tables are adjusted for the MWPC but not all individuals are eligible for the credit.
• Simplifying the education tax provisions by not having so many. They also need to be better targeted. Consideration should really be given to why these items are in the tax law rather then just enabling the Dept of Education to determine who should get education assistance.
• Rather than capping the tax benefit of all itemized deduction, why not reduce or eliminate the ones that make no sense. That is, why cap someone home equity debt or mortgage interest on their second home to 28% when there is no good reason to even have these deductions in the law.

Obama formed a Tax Reform Tax Force (President Bush had an Advisory Panel on Tax Reform) to look at simplification, reducing the tax gap and reducing corporate loopholes. Their report is due 12/4/09. What will they say about Obama's revenue proposals or how will they fit within any proposals?

What do you think? Should we be enacting tax system changes that will increase the deficit by over $1 trillion over the next 5 years?