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Tax Reform 2011 (05/29/2011)
by Richard Schneider

Emeritus Professor of Accounting

Winona State University

Will there be tax reform in 2011, not so much. Reform would require compromise and with both parties preparing for the 2012 elections, compromise may well cost them some support from the far right or far left. I think reform will come after the 2012 elections. When the dust settles from the elections, I believe enough moderates will prevail to counter balance the current extreme positions.

Kiplinger one of my tax news services also believes that reform will not come until 2013. Their predication is for lower overall tax rates, with an expanded taxable income base. Special treatment for capital gains will be reduced. There will a loss of accelerated depreciation at least for large companies, and elimination of special tax breaks for the large oil and gas companies.

In my opinion, the widening of the tax base will include a limitation of, reduction of, or elimination of certain itemized deductions, such as mortgage interest. Tax credits, will also be targeted for reduction or elimination. There is a long menu of credits to choose from such as research & development for business, energy efficient property, child tax credit, child and dependent care, higher education, earned income credit, electric auto, holders of tax credit bonds, retirement savings, foreign tax, mortgage interest, domestic production, intangible drilling, etc. Yes, there is a long list and some taxpayers have become dependent on credits to reduce their tax to zero or near zero; such as GE, or to generate a large refund; such as low-income families working at low paying jobs.

Will we have significant reform? The last time there was significant reform was 1986, but gradually over time, the reforms were short-circuited as congress and the president approved more deductions and credits, and then lowered the tax rates. The result appears to be a large deficit, and a phobia about raising tax revenue. We also have a number of people who cannot comprehend that favored tax deductions, tax credits, and lower tax rates are just as much a spending issue as defense, foreign aid, and Medicare.

True reform, in my opinion, will not come until the income tax system is scrapped, and replaced with a revenue system that is easy to: administer, understand by any person with at least an eighth grade education, and comply with and pay without the assistance of a paid professional. In addition, the tax should not be regressive, as most sales or consumption taxes are, nor have the hassle and cost of a rebate system, as the so-called “Fair Tax” has.



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