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more on Toward a Saner Tax Code
From: David Farber <dave () farber net>
Date: Tue, 25 Oct 2005 13:02:38 -0400
Begin forwarded message: From: David Curley <curleyd () sbcglobal net> Date: October 25, 2005 10:43:15 AM EDT To: dave () farber net Subject: Re: [IP] Toward a Saner Tax Code If only it were true....Chris Farrell is pretty much wrong about the Advisory Panel's suggestions. In general they are not fair (at least to the middle and upper-middle classes) and do not simplify the code. Reducing the number of marginal rates is a trivial simplification: calculating the correct tax for a given taxable income is simply a function of looking at a table, and that's true whether there are three rates or three thousand.
In general, the changes don't have much impact on the very wealthy, who have little mortgage debt relative to the rest of their finances, except to drastically lower their taxes by eliminating the AMT (and allowing the tax dodges it was meant to override back into play) and limiting taxes on dividends and capital gains, which provide the majority of their income.
Here are some cherry-picked quotes from James Maul (http:// tinyurl.com/arvp4, plus more from him on the proposals and the mortgage interest deduction at http://tinyurl.com/9tyk6 and http:// tinyurl.com/bsn3x) on the proposals: "if all of this happens, there will be more forms, and more lines on existing forms, despite the removal of the alternative minimum tax form from the inventory."
"Putting these together, it's more likely to decrease than increase progressivity. So the challenge is to define the word 'appropriately' in the phrase appropriately progressive manner.' Considering that I consider lower rates for dividends and capital gains to be inappropriate, more of the same also is inappropriate."
"It would have been nice to see a wholesale re-write of the charitable contribution deduction. It is a forest of tangled threads, a contraption with which almost every Congress has tinkered, and a trap for the unwary."
Dave CurleyOn Tue, 25 Oct 2005 05:32:40 -0700, David Farber <dave () farber net> wrote:
Begin forwarded message: From: Gregory Hicks <ghicks () cadence com> Date: October 25, 2005 12:15:03 AM EDT To: dave () farber net Cc: ghicks () cadence com Subject: Toward a Saner Tax Code Reply-To: Gregory Hicks <ghicks () cadence com> Dave: For IP if you wish...http://www.businessweek.com/bwdaily/dnflash/oct2005/ nf20051025_1018_db013.htmOCTOBER 25, 2005 SOUND MONEY By Chris Farrell Toward a Saner Tax Code The President's tax-reform panel has penned a comprehensive plan to streamline the convoluted code. Is anyone in the White House listening? Last January, President George W. Bush named a bipartisan panel to come up with a better tax system. Final recommendations are due Nov. 1, but the President's Advisory Panel on Federal Tax Reform has already issued its preliminary recommendations. My reaction to the committee's work: Bravo. It has come up with a sound, practical way to make the tax code simpler and fairer, with lower compliance costs for the average citizen, while also doing away with the alternative minimum tax, or AMT (see BW Online, 10/18/05, "An Either/Or Plan for Tax Reform"[0]). (The panel actually produced two plans -- one involving income taxes, the other closer to a consumption tax. Since the real differences largely involve business taxes as opposed to individual taxes, I'm concentrating on the income tax proposal.) That's why it's disturbing that the reaction so far among Washington cognoscenti has been a collective yawn. The White House hardlystirred. "We're going to take into account all the work they have doneand the recommendations they are making," said White House spokesman Scott McClellan. TAXING ISSUES. There is no question that the American tax code is a disgrace, riddled with exemptions, deductions, exclusions, credits, phase-ins, phase-outs, and temporary breaks (see BW Online, 5/30/05, "Tax Reform's Key? Stop Hammering Investors"[1]). Almost every year, thanks to congressional and Administration fiddling, the tax code becomes ever more Byzantine. The total number of pages in the federal tax code is more than 60,000, up 48% in nine years, according to the Cato Institute, a Washington, D.C.-based think tank. The percent oftaxpayers who hired a professional to help calculate their taxes jumpedto 62% in 2003 from 50% in 1995. The Commission's reform mantra can be summed up as simplification, fairness, and modesty. Specifically, it isn't advocating a radical tax overhaul, such as a national sales tax or flat tax. Instead, it suggests broadening the tax base by eliminating many deductions and exemptions, and replacing many of them with a handful of credits. The number of schedules and worksheets would decline from 52 to 10. It would streamline the number of tax rates from six to four, with a top rate of 33% vs. the current 35%, and it would maintain progressivity, with the wealthy paying a higher percentage than their lower-income neighbors. Best of all, the Commission's broadening of the tax base will make up for any revenue lost by the elimination of the AMT. MORTGAGE INTEREST. The most striking recommendation is transformation of the mortgage-interest deduction into a credit. Currently, interestpayments on a mortgage below $1 million are deductible. Obviously, thattax break is more valuable to high-income earners. The panel suggests converting the deduction into a credit equal to 15% of the mortgage interest paid. The amount of a mortgage eligible forthe credit would be circumscribed by the Federal Housing Administrationloan limitation. That figure varies by region, but currently averages about $265,000. In other words, the credit will still encourage homeownership, especially among first-time buyers. Yet it will limit the tax break for upper-income households moving into McMansions. Another highlight involves tax-deferred savings. For instance, the American worker is increasingly responsible for putting away money for retirement. But the government makes it tougher than necessary. Think about it: There are 401(k)s, 403(b)s, 457s, SIMPLEs (Savings Incentive Match Plans for Employees), SEP-IRAs (Simplified Employee Pension-IRAs), IRAs, nondeductible IRAs, Roth IRAs, Roth 401(k)s, sole 401(k)s, and so on. Each retirement plan has different rules and regulations, despite some movement in recent years toward making them more harmonious. There's also a variety of education savings plans. 15% BRACKET? The panel wants to replace these multiple accounts with three: Save at Work, Save for Retirement, and Save for Family. The Save at Work account would act like a 401(k), funded with pretaxdollars. The Save for Retirement account would replace various IRAs; itwould largely imitate an expanded Roth, allowing individuals to set aside up to $10,000 in after-tax dollars that could be withdrawn tax-free in retirement. The Save for Family account would substitute for tax-advantaged educational and health savings plans. Taxpayers could contribute savings of up to $10,000, and withdraw up to $1,000 a year for any reason and no tax liability. Other highlights include replacing personal and family tax breaks with a single family credit, and purging the marriage penalty. The President's tax-reform panel estimates that three-quarters of all taxpayers will be in the 15% tax bracket. The panel's most immediate problem was to resolve the dreaded individual alternative minimum tax (see BW Online, 9/20/04, "What A "Fairer" Tax Code Might Look Like"[2]). And it succeeded.INFLATION'S BITE. Indeed, the panel's minimal mandate was to eliminate it. The original goal of the AMT, which became law in the 1970s, was todo away with tax loopholes that allowed the extremely wealthy to avoid taxes. But, since 2000, the AMT has evolved into a parallel tax system. Assuming the law stays in place, 3.6 million filers -- 30% with incomes below $200,000 -- could pay the AMT this year, estimates the Tax Foundation, a nonpartisan tax-research organization based in Washington, D.C. What happened? Congress failed to index the AMT for inflation. Over time, rising real estate values, higher local tax payments, increased incomes, and the proliferation of credits for children and education pushed more middle- and upper-middle-income folk into the AMT. The Bush Administration's tax cuts also reduced regular income tax liabilities, while the AMT remained essentially unchanged. Since taxpayers are on the hook for whichever bill is larger, the decline in income taxes forced more taxpayers out of the regular tax system and into the AMT. If the panel gets its way with tax reform, middle-class taxpayers won't have to hold their breath and calculate the AMT as the Apr. 15 deadline nears. IN BUSH'S COURT. To be sure, I don't like everything the panel hasrecommended. It's a slam dunk that there will be fierce opposition. Thereal estate industry can't be happy. Politicians from high-tax states are outraged, because the deduction for state and local income taxes will be eliminated. And the White House, reeling from a variety of setbacks -- including the political death of the Administration's main domestic priority, Social Security reform -- doesn't have a lot of political capital to spend these days. The last major overhaul of the tax system occurred in 1986, but that was a very different time. Back then, President Ronald Reagan and abipartisan group of congressional power brokers worked together to pass the Tax Reform Act of 1986. So far, George W. Bush has shown that he isno Ronald Reagan, and vitriol -- not bipartisanship -- is now the language of Washington. NO EXCUSES. Still, President Bush may have no choice but to try and seize the mantle of tax reformer. He may also be able to force a reluctant Congress to go along. The reason is simple: the AMT. Without reform, the AMT will hit more and more middle-class families,provoking the risk of a vicious backlash for the party in power. I say,shame on Washington if political inertia and special-interest bagmen prevent Congress and the Administration from embracing the advisory panel's blueprint for much-needed reform.[0] http://www.businessweek.com/bwdaily/dnflash/oct2005/ nf20051018_2433.htm [1] http://www.businessweek.com/magazine/content/05_22/ b3935045_mz007.htm [2] http://www.businessweek.com/magazine/content/04_38/ b3900051_mz011.htm--------------------------------------------------------------------- Gregory Hicks | Principal Systems Engineer Cadence Design Systems | Direct: 408.576.3609 555 River Oaks Pkwy M/S 6B1 | Fax: 408.894.3479 San Jose, CA 95134 | Internet: ghicks () cadence com I am perfectly capable of learning from my mistakes. I will surely learn a great deal today. "A democracy is a sheep and two wolves deciding on what to have for lunch. Freedom is a well armed sheep contesting the results of the decision." - Benjamin Franklin "The best we can hope for concerning the people at large is that they be properly armed." --Alexander Hamilton ------------------------------------- You are subscribed as curleyd () sbcglobal net To manage your subscription, go to http://v2.listbox.com/member/?listname=ipArchives at: http://www.interesting-people.org/archives/interesting- people/
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