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Thursday, April 16, 2009

Confusing Tax Cuts with Simplification

President Obama's tax day (4/15) press statement notes that he is committed to a simpler tax code:

"President Obama will underscore his commitment to a simpler tax code that rewards work and the pursuit of the American dream and supports a future of sustained economic growth that creates good jobs and rising incomes for all Americans."

Then the bulk of the statement lists provisions of the recently enacted stimulus bill (PL 111-5; 2/17/09) that provide tax cuts to individuals. Unfortunately, these provisions mostly add complexity to the system, most of which could have been avoided.

Here is the list and my take on what would have been a simpler way to provide the relief.

Making Work Pay Tax Credit - despite the credit being given via withholding tax table changes, many people will need to refile W-4 statements to avoid being under withheld because of the phase-out of the credit for high income individuals and the credit's interaction with other stimulus payments. For example, if Bob's wages qualify him for the credit, but his wife's are much higher such that they are not entitled to any or all of the MWPC, they should adjust their W-4 to increase their withholding to avoid owing on 4/15/2010. A simpler alternative would have just been to increase the Earned Income Tax Credit or lowered the rate for the first tax bracket.

Expansion Of The First-Time Homebuyer Tax Credit - as long as this is kept temporary, it should be fairly easy for individuals to address.

Increased Earned Income Tax Credit and Expansion of the Child Tax Credit - it is good to provide relief through existing tax provisions. The only confusing part is that the change is temporary.

American Opportunity Tax Credit - this takes an existing tax credit - the Hope Scholarship Credit and renames it for 2 years and expands it. First, it is confusing to rename something for two years. Second, why not just use the funds to increase scholarships and grants that already exist at the federal and state levels.

Benefits For Retirees, other Social Security Beneficiaries and Disabled Veterans - similar problems to the MWPC. Why not just reduce the lowest tax rate for 2 years and increase the EITC.

Auto Sales and Excise Tax Deduction - this temporary deduction provides a small benefit - particularly compared to the difference in price between a new and a used car. This provision will confuse people - it should have been skipped.

Carryback Of Net Operating Losses For Small Businesses - while it is nice to give small businesses a temporary choice of how far back they want to carryback an NOL (but no longer than 5 years), the choice leads to the need to perform multiple calculations and use your crystal ball as to how this change interacts with any possible NOL generated in 2009. It is a helpful way to get some dollars in the hands of struggling small businesses, but perhaps the choices should have been reduced to the existing 2 year carryback or a 4-year carryback to reduce compliance costs.

Let's be more vigilant in helping Congress and President Obama find simpler ways to reduce or increase taxes (I've written previously on the complications of how the President's tax plan to get more money from higher income individuals takes an approach that is more complicated than necessary).

What do you think - what are some simplifications that will enable the President to reduce taxes for 95% of taxpayers (and increase them for the other 5%) without adding unnecessary complexity to the tax system?

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