Friday, December 3, 2010


OK – I have read through PART II (Tax Reform) of the the National Commission on Fiscal Responsibility and Reform’s “The Moment of Truth”.

The section begins with an excellent assessment of our current tax system –

America’s tax code is broken and must be reformed. In the quarter century since the last comprehensive tax reform, Washington has riddled the system with countless tax expenditures, which are simply spending by another name.”

It goes on to state that –

The current individual income tax system is hopelessly confusing and complicated” and “fundamentally unfair, far too complex, and long overdue for sweeping reform.”

The Commission believes that –

Tax reform should lower tax rates, reduce the deficit, simplify the tax code, reduce the tax gap, and make America the best place to start a business and create jobs.”

As discussed in the initial draft report, the Commission recommends we use “zero-base budgeting” by “eliminating all income tax expenditures”. Basically we would begin with no exemptions, deductions or credits. Congress and the President would then “decide which tax expenditures to include in the tax code in smaller and more targeted form than under current law, recognizing that any add-backs will raise rates”.

The report states that add-backs should be included for –

“* Support for low-income workers and families (e.g. child credit and EITC);
* Mortgage interest only for principal residences;
* Employer-provided health insurance;
* Charitable giving;
* Retirement savings and pensions

The report’s “Illustrative Proposal” would

* Create three (3) tax brackets – 12%, 22% and 28%.

* Repeal the dreaded Alternative Minimum Tax (AMT) and “PEP and Pease” (the “read my lips” taxes).

* Keep the Earned Income Tax Credit (EITC) and the Child Tax Credit either in current form or in some revised alternative (I assume this includes maintaining the refundable component).

* Keep the current law for the Standard Deduction and Personal Exemptions. Itemized deductions would be eliminated – so no more Schedule A.

* Tax capital gains and dividends at ordinary income rates.

* Create a non-refundable (thank God) 12% credit, available to all taxpayers, for mortgage interest on up to $500,000 of acquisition debt on a primary personal residence. There would be no tax benefit for equity loans or second residences.

* Create a similar, and also non-refundable, 12% credit for all taxpayers for charitable giving, with a 2% of AGI exclusion.

* Continue to exclude from income the cost of employer-provided health insurance premiums, capped at 75% of 2014 premium levels.

* Tax the interest on newly-issued currently tax-exempt state and municipal bonds.

* Consolidate the current menu of retirement accounts into one plan that limits “tax-preferred” contributions to the lesser of $20,000 or 20% of income.

* Expand the Saver’s Credit.

All other “tax expenditures” (i.e. deductions and credits) would be eliminated.

The Commission wants the tax rates to be structured so that $80 Billion in excess income is generated to reduce the deficit in 2015 and $180 Billion is generated in 2020.

To make sure that Congress moves quickly to pass comprehensive tax reform legislation, “the Commission recommends enacting a ‘failsafe’ that will automatically trigger should Congress and the Administration not succeed in enacting legislation by 2013 that meets specified revenue targets”. So if Congress remains true to form and sits on its arse too long the “failsafe” would impose across-the-board reductions in deductions and credits.

So that is what the final report, which will be voted on by the members of the Commission today (Friday), recommends.

Over the week-end I will work on my own tax reform plan, using this report as a starting point, and let you know my recommendations next week. I look forward to hearing what you think.



Peter Reilly said...

The Internal Revenue Code of 20??. I think they might actually pull it off. I bet it will be The Internal Reveue Code of 2013. We need one party or the other to sweep the election. It would probably be better to just give everybody a check equivalent to the EITC and then tax it away from most of us. I've got a piece on bad preparers coming out Monday. EITC is a big source of those problems.

Alaina said...

Just ran across your blog today and you have some great information on here. thanks!