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Tax reform again (09/22/2010)
by Richard Schneider

Emeritus Professor of Accounting

Tax reform has been a chant for as long as I can remember. We get tax law change and increased complexity, but not real reform. With a new president usually comes a commission or board to recommend tax law changes. President Bush’s commission reflected the supply side, and the core Republican values. They recommended unearned income; interest, dividends, and capital gains, not be taxed at all. President Obama’s Economic Recovery Board has issued its initial recommendation for tax overhaul. We can expect they will also be tilted to the Democrats’ values, including the demand side economics, and more progressive tax rates. Having said this, I do think each commission or board has had some very good ideas for simplifying compliance and computation of tax.

Some of the items suggested by President Obama’s board are:

1. Family tax deductions and credits – combine the personal exemption, standard deduction, and child credit into one credit.

2. Earned income credit and extra child credit – combine these into one.

3. Education deduction and credits – take the one deduction and several credit options, which are confusing, and have just one credit.

4. Alternative minimum tax – adjusting the exclusion amounts, as more middle incomers are slated to be caught.

5. Retirement savings, 401K, 403B, and 457 – combine these into one plan, and simplify the rules.

6. Health and education saving plans, MSA, HSA, Archer, Coverdell, and 529 plans – combining and simplifying.

The board’s recommendation concerning tax rate amounts for low, middle, and upper income levels will be released later. We can expect a recommendation to roll back the Bush tax rate reductions for the upper incomers, but not for those with taxable income below $250,000. Republicans have and will continue to oppose this, trying to convince middle and lower incomers that their tax will also increase.

Over the past 20+ years, when Congress passes a tax reform bill, the tax consultants, and preparers are licking their chops. They know it’s a revenue enhancement act for them. Let’s hope for some real reform this time around, allowing more taxpayers to prepare their own returns.

I have been a continuing advocate of scrapping the income tax, and replacing it with a transaction tax. A transaction tax that allows easy compliance, is progressive, and requires all constituents to contribute support to the federal government. We should all realize the services and defense we receive from the federal government are not free.  


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