According to the Joint Committee on Taxation (the highlight is mine) -
“Tax expenditures are defined under the Congressional Budget and Impoundment Control Act of 1974 (the ‘Budget Act’) as ‘revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.’ Thus, tax expenditures include any reductions in income tax liabilities that result from special tax provisions or regulations that provide tax benefits to particular taxpayers.“
One proposal is to completely scrap the current Tax Code and start from scratch with “everything is taxable” and “nothing is deductible” - and add back only those very few “excepts” that are considered to be appropriate. This was what was suggested by BO’s “National Commission on Fiscal Responsibility and Reform”, whose final report sits in an archive somewhere gathering dust, along with the similar report by Dubya’s commission.
My question to you, as fellow tax professionals, is - “What current ‘tax expenditures’ would you want to see remain in a new, simpler Tax Code?”
I will begin the discussion with what I would keep and otherwise change. FYI, I would, like Romney, do away with Schedule A and allow the deductions that remain be deductible against gross income.
(1) I would do away with the special tax rates for “qualified” dividends and long-term capital gains. However I would return the 50% “capital gain deduction” that had appeared on Schedule D decades ago. On the corporate side I would permit a “dividends paid” deduction to do away with double taxation.
(2) I would tax Social Security and Railroad Retirement benefits the same way that other retirement income is taxed, amortizing employee contributions over the recipient’s assumed lifetime.
(3) I would do away with the deduction for depreciation of real property on all Schedules – A,C, E, F – as well as on corporate, partnership, estate, and trust returns.
(4) I would replace the IRA, ESA, HSA, and MSA with one USA – “Universal Savings Account”. I would also replace all of the various retirement savings options for self-employed taxpayers (i.e. Keogh, SIMPLE, SEP, etc) with one SERSA – “Self-Employed Retirement Savings Account”.
(5) I would allow deductions for state and local income taxes, real estate taxes paid on the taxpayer’s primary personal residence only, and mortgage interest on acquisition debt for a primary personal residence only.
The Internal Revenue Code taxes Americans based on income measured in pure dollars. However it is a fact that the “value” of one’s level of income differs, sometimes greatly, based on one’s geographical location. A family living in the northeast or California that has an income of $150,000 may be just getting by, while a similar family that resides in “middle America” lives like royalty on $150,000. Many components of the Tax Code are indexed for inflation, but nothing is indexed for geography. To be honest I have no idea how one would even begin to index for geography.
It costs an awful lot to live in New York, certainly New Jersey, Connecticut, and California. State and local income and property taxes are the highest in the country. The cost of real estate is also excessively high. As a result one must earn a lot more money to be able to live in these states – and salaries are arbitrarily increased to reflect the increased cost of living. Yet $150,000 in income is taxed by the federal government at the same rate in New York City as it is in Hope, Arkansas.
Taxes and the cost of a home, and therefore also the amount of “acquisition debt” mortgage interest paid on a residence, are higher in the Northeast, and California. Since we pay taxes on “net income” after deductions, allowing an itemized deduction for these items would help to somewhat geographically “equalize” the tax burden.
(6) I would continue to allow a deduction for certain “employee business expenses”. Some employees receive a salary and are reimbursed in full for “employee business expenses” via an “accountable plan”. Others, generally outside salesmen, receive a base salary and/or commissions, and perhaps a flat monthly “expense allowance” which is included in W-2 wages, and all employee business expenses are truly “out of pocket”. Allowing a deduction for unreimbursed employee business expenses assures that the true net economic benefit is being taxed.
However, I would change the current rules for deducting business use of an automobile – which would apply to employee business expenses and Schedule C, E and F – to remove the deduction for depreciation, either actual or as a component in the standard mileage allowance. For the most part, taxpayers who use their car for business, other than commuting, would own a car whether or not one was needed for business. The business use, however extensive, is basically secondary to personal use.
There would be one standard mileage allowance for all deductible travel, which would be indexed annually for inflation in the same manner as everything else in the Tax Code is indexed for inflation, and not based on a separate calculation.
In the case of motor vehicles used 100% in a business – trucks, vans, limos, cars that are leased out to others (including one’s corporation) or used exclusively by couriers or for deliveries – a deduction will be allowed for 100% of the actual costs of maintaining and operating the vehicle, including depreciation.
(7) I would continue to allow gambling losses, to the extent of reported gambling winnings to be deducted, as well as all contingent legal fees related to an award of settlement, so that these items of income would be reported as “net”.
(8) And I suppose I would continue to allow a deduction for charitable contributions.
Current “tax expenditures” for items like college tuition and energy-efficient purchases would no longer be included in the Tax Code. But these benefits are certainly worth continuing in another form. The tax deductions and credits would be replaced by direct “point of purchase” grants or rebates out of the budgets of the appropriate agencies. Additional tuition grants could be provided via the current system, and there could be “Cash for Clunkers” like rebates for energy efficient purchases.
So now it is your turn. I look forward to reading your comments and discovering what you would keep.