Thursday, November 11, 2010

MORE ON THE DRAFT REPORT ON TAX REFORM

The President's Economic Recovery Advisory Board (PERAB) “Report on Tax Reform Options” gave us nothing new in the way of tax reform proposals. All it really did was affirm that the current Tax Code is complicated and convoluted – although it could have been used as a starting point for serious discussion and debate on the issue of tax reform.

PERAB was established by President Obama in March of 2009 “to ensure the availability of independent, nonpartisan information, analysis, and advice as he formulates and implements his plans for economic recovery and enhancing the strength and competitiveness of the Nation’s economy”. Its Chairman was Paul A. Volcker. The first task was “to consider ideas on tax simplification, better enforcement of tax law, and reforming corporate taxes and to present the pros and cons of potential tax options.”

The Board’s report was forgotten as soon as it was issued, and, like the report of Dubya’s tax reform panel, sent off to gather dust in the National Archives.

The National Commission on Fiscal Responsibility and Reform co-chairmans’ draft report (see my previous post) discusses real options for genuine tax reform and simplification. Howard Gleckman, writing for the Tax Policy Center’s TAX VOX blog, calls the draft report, which also deals with reducing the federal deficit, “tough, specific, credible, and even creative”.

President Obama created the Commission on Feb. 18, 2010 to “identify policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run”. Its Co-Chairmen are Alan Simpson, former Republican Senator from Wyoming and Erskine Bowles, Chief of Staff under Clinton. Number 2 of its “Five-Part Plan” is to “pass tax reform that dramatically reduces rates, simplifies the code, broadens the base, and reduces the deficit”.

Let us hope that (1) the Commission’s members support the co-chairs’ draft report, and (2) when presented it is taken seriously and results in action by Congress.

Hey – I can dream, can’t I!

A few more thoughts I forgot to include in my initial reaction post on the draft report –

I would support a continuation of preferential tax rates for long-term capital gains. If there is a Dividend Paid deduction for corporations then dividends will no longer be “double-taxed” and there would no longer be a need for special tax rates for qualified dividends.

When “adding-back” tax benefits Congress needs to look at the reporting requirements with an eye toward reducing individual taxpayer burden.

For example - if, as suggested, the deduction for mortgage interest is limited to acquisition debt of up to $500,000 for one primary principal residence then the Act needs to create three specific mortgage products – the purchase mortgage, the improvement home equity loan, and the “unrelated” home equity loan. Since only acquisition debt – money borrowed to buy, build, or “substantially improve” a personal residence – on one primary personal residence (at a time) would be allowed, only interest on the purchase mortgage and improvement home equity loan for that one primary personal residence would be deductible.

An applicant would have to document to the lendor, via submission of initial proposals and progress reports, that the money from an improvement home equity loan was indeed used to “substantially improve” the residence. While each individual product could be separately refinanced, only a purchase mortgage and improvement home equity loan would be able to be combined via refinance.

The Form 1098 would separately identify interest and points for acquisition debt mortgage loans (purchase debt and improvement equity) and indicate whether the amounts were for a “primary personal residence” and the average principal balance on the loan for its period of existence in the calendar year. Interest on residences that are rented would still be deductible under current rules on Schedule E. No Form 1098 would be issued for “unrelated” home equity debt, as interest on this type of debt would not be deductible.

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