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.
RDF
All fired up to add to your list and now at the end I find you and I are of like mind.
ReplyDeleteAlthough I would disagree with the SS income. This should remain leveled as a lot of SS recipients don’t get receive much and truly would be more desolate by the burden of losing 15% to our crooked government.
USA – “Universal Savings Account”. This is a great idea.
A fair tax solution would need to take COLA into effect/thought by geography. Currently like you mention it does not. I don’t believe it would be that hard to solve this as this country is divided really well geographically. Our US Postal code Zip code does this for us. The idea of using homeowners’ mortgage interest is decent enough, but I fear is not a plausible solution. The amount of one’s house payment is the same, month after month, generally, yet on a fifteen year loan, the interest paid reduces considerably year to year. Thus in your proposed plan would raise the taxpayers AGI, (I am assuming that your “acquisition debt” mortgage interest paid on a residence, is above the line.
The one thing I would rid ourselves of is the financial assistance program our tax code offers those who have nothing better to do with their time then have babies. EIC is a good program but we need to get our children out of the equation and make it more of a program that helps low-income taxpayers. If not do away with it all together.
I like the new Blog Robert, I hope you can continue it.
Foreign Earned Income Credit or Foreign Tax Credit. People working outside the US shouldn't have to pay taxes twice to two different governments on the same income.
ReplyDeleteAs to Bruce's comment about EITC, NO REFUNDABLE CREDITS!
ReplyDeleteSeriously. No refundable credits of any kind to anyone. No getting back more than you paid in. It's an invitation to fraud. If Congress wants to give money to people they can find another mechanism than the income tax return.