Saturday, August 28, 2010


In a meeting yesterday afternoon (Friday, August 27th) the President's Economic Recovery Advisory Board (PERAB) released its report, summarized their concerns, and voted to send the report to President Obama for review. This is the report that was originally supposed to be presented to BO by December 4, 2009.

Unlike George W’s earlier panel, which made specific recommendations for serious tax reform, the PERAB was unfortunately limited by some specific instructions from the White House. Although, as the preface to the report states, “some members of the PERAB believe that such {broad tax} reform will be an essential component of a strategy to reduce the long-term deficit of the federal government”, the panel made no recommendations at all. The report merely outlines general options for change and indicates both the benefits and disadvantages of each option.

Here is how Howard Gleckman excellently describes the panel’s report in his post “Obama’s Tax Reform Panel: A Missed Opportunity” at TAX VOX, the Tax Policy Center blog -

You buy what you think will be a state-of-the-art GPS device to give you driving directions. The gizmo was designed by a committee of the nation’s smartest highway engineers. But instead of telling you to turn right now, the e-voice says something like this: ‘You could turn right now. It would be better than going straight, which is a really bad choice but, on the other hand, the road might be a little bumpier and besides, you could also get where you want to go by turning left three blocks from here. So I’m not actually recommending what to do.’

Howard goes on to explain the missed opportunity –

Obama might have used this exercise to jump-start a debate over fundamental tax reform. Instead, the report does nothing to fill the policy vacuum that is being filled by an argument over what to do about the decade-old Bush tax cuts."

PERAB was originally created by BO back in June of 2009. It was charged with considering ways to simplify the tax system, improve taxpayer compliance with existing laws, and reform the corporate tax.

The Board was told to exclude options that would raise taxes for families with incomes less than $250,000 a year. According to the report’s preface – “We interpreted this mandate not to mean that every option we considered must avoid a tax increase on such families, but rather that the options taken together should be revenue neutral for each income class with annual incomes less than $250,000.”

And, as per the original press briefing that introduced the Board back in June of 2009, the PERAB was also instructed to examine “ways of unifying, streamlining, making more consistent the various credits that are out there: Making Work Pay, the Earned Income Tax Credit, the Child Tax Credit, and what have you.”

The meat of the report begins with a simple, but obvious, statement – “The tax code is complex”.

The introduction to the Simplification Options section goes on to explain why, including the following paragraph (the highlight is mine) –

The complexity of the tax code is partly the result of the fact that new provisions have been added one at a time to achieve a particular policy goal, but with inadequate attention to how they interact with existing provisions. This results in duplicative and overlapping provisions, multiple definitions of concepts like income and dependent children, differences in phase outs, and differences in the timing of expiring provisions. Between 1987 and 2009, the instruction booklets sent to taxpayers for the Form 1040 increased in length from 14 pages to 44 pages of text. The tax code has become more complex and more unstable over the last two decades in part because legislators have increasingly used targeted tax provisions to achieve social policy objectives normally achieved by spending programs. There have been more than 15,000 changes to the tax code since 1986, and a current JCT pamphlet lists 42 pages of expiring provisions.”

The report covers the three areas it was formed to investigate – simplification, compliance, and the corporate tax. The Simplification Options cover Simplification for Families, Simplifying Savings and Retirement Incentives, Simplifying Taxation of Capital Gains, Simplifying Tax Filing, Simplification for Small Business, and The (dreaded) AMT.

Most of these options concern simplifying and consolidating various similar tax credits and benefits. The report points out, for example, that – “The tax system includes at least 18 different provisions benefiting taxpayers with educational expenses.”

Simplification Options include-

* Consolidate the dependent exemption, standard deduction, and Child Tax Credit into a “Family Credit” available to all taxpayers, and replace the EITC and refundable portion of the Child Tax Credit with a “Work Credit”, eliminate the dependent Care Benefit and replace tax benefits for higher education with a generous extended family credit for full time students under age 22.

* Replace the large number of subsidies that exist to help taxpayers pay for current education expenses with one or two alternatives.

* Simplify the “Kiddie Tax” by raising the standard deduction for dependents and eliminating the interaction of the dependent’s income with a parent’s tax rate and with siblings’ income.

* Eliminate the Head of Household filing status entirely and require all unmarried taxpayers to file as Single.

* Eliminate the ability of divorced or separated parents to exchange the dependency exemption.

* Consolidate all employer-based defined contribution plans into one work-based retirement account, all individual plans into one individual retirement account, and all special purpose savings accounts (i.e. ESA, HSA) into one account for non-retirement savings.

* Allow all workers to contribute to either or both an IRA and an employer-sponsored plan irrespective of income (thereby eliminating nondeductible IRAs).

* Eliminate minimum required distribution (MRD) rules for individuals with retirement assets below an income threshold.

* Simplify the calculation of Social Security benefits.

* Require the use of the Average Cost Method to determine cost basis for the sale of all mutual fund shares.

* And it seems everything old is new again – Replace the various capital gain tax rates with a 50% capital gain exclusion.

The report also brings up BO’s proposal of “The Simple Return”. Taxpayers would be sent a pre-filled return with the information from the IRS matching program and the previous year’s return and a preliminary calculation of tax liability. An alternative would be to allow taxpayers and preparers to download the information from the matching program. I have always been against this idea – see my post “A Very Bad Idea”.

Regarding the dreaded Alternative Minimum Tax (AMT), option 1 in the report is to Eliminate the AMT.

Many of the options discussed in the report are similar to or the same as recommendations of Dubya’s panel, and the report so states.

While there is really nothing new in this report or, due to the restrictions given to the Board by BO, any serious suggestions for reform, it should be reviewed seriously by the Administration and Congress, and not just filed away somewhere for posterity.

In a letter to the Treasury Secretary the committee said, "The effort to reform the tax code is noble in its purpose, but it requires political willpower." Perhaps this was a reference to the fact that the recommendations of Dubya’s 2005 tax reform panel were totally ignored.

Congress must do something to reform the mucking fess of a Tax Code in 2011!

FYI – I (Robert D Flach of Taxpro Services Corporation) am listed in the Appendix of the report as a source of public comment presented to the Board.


1 comment:

Anonymous said...

Here is a link to something I found (while searching out news having to do with the Alternative Minimum Income Tax exemption amount for the tax year 2010) --

FISCAL YEAR 2011 BUDGET PROPOSAL and prepared by the Joint Tax Committee and dated August 16, 2010.

It totals 521 pages. I only skimmed a few pages by checking the Table of Contents and then reading the few pages I was interested in.

How can anyone believe that our legislators want us to be able to prepare our taxes, let alone understand how much our tax liability really is when you see the lengths they go to to amend our tax code for the coming year. President Obama has said he doesn't want taxpayers making less than $250000 having to pay more in tax yet his administration has not yet passed a Patch for the AMT Exemption amount even now when we are more than half way through the tax year 2010. Further his proposal does nothing to increase the AMT exemption amount for a married couple filing jointly to twice that of a single individual. Where's the fairness? And why should we have to go through all those wacky computations. Further his administration wants to go back to limiting the size of personal exemptions and itemized deductions.

When I go shopping in a retail store the tag of the item clearly states the price and I can figure the discount (if there is one) in my head and multiply by the sales tax rate and determine the total cost of the item I might purchase. I used to be able to mentally compute my tax liability just by jotting down the figures on a piece of paper and using a calculator and knowing what the ballpark income numbers were. That no longer is the case. I like to plan for the coming year every January projecting everything out. Our government makes it practically impossible (although I still do attempt it). It’s just as bad for individuals as it is for businesses who don’t know what rules will be in effect and when they will be in effect.

What good does it do to have advisory panels come up with recommendations to make tax preparation easier when the Obama Administration continually puts out reports like the one the Joint Tax Committee put out on August 16, 2010?

Something’s got to give!!!!!