29 August 2010

Low Profile Tax Reform

The President's Economic Recovery Advisory Board, led by former Fed Chair Paul Volcker has offered up a treasure trove of proposals for tax simplification, increasing tax compliance, corporate taxation and international taxation, all of which are revenue neutral or tax reducing for families making less than $250,000 a year, in a new 128 page report.

These are (mostly) moderate, sensible proposals, many of them old chestnuts that no one has seriously disagreed with but that have lacked political umph, that have a real chance of becoming law is the President and Congressional leaders decide to back them.

The table of contents (formatting added and some details omitted) tells the story:


Option Group A: Simplification for Families
1: Consolidate Family Credits and Simplify Eligibility Rules
-1. Consolidate Family Benefits into a Work Credit and a Family Credit
-2. Combine the EITC, Child Tax Credit, and the Child Dependent Exemption
-3. Consolidate the Child Tax Credit and Dependent Exemption, and Repeal (or Reduce) Some Education Credits
2: Simplify and Consolidate Tax Incentives for Education
3: Simplify the “Kiddie Tax” (Taxation of Dependents)
4: Simplify Rules for Low-Income Credits, Filing Status, and Divorced Parents
-1. Harmonize the EITC and Additional Child Tax Credit
-2. Simplify Filing Status Determination
-3. Eliminate the “Household Maintenance Test” for “Estranged” Spouses
-4. Simplify the EITC for Childless Workers
-5. Clarify Child Waivers in the Event of Divorce or Separation

Option Group B: Simplifying Savings and Retirement Incentives
1: Consolidate Retirement Accounts and Harmonize Statutory Requirements
2: Integrate IRA and 401(k)-type Contribution Limits and Disallow Nondeductible Contributions
3: Consolidate and Segregate Non-Retirement Savings
4: Clarify and Improve Saving Incentives
-1. Make the Saver’s Credit a Match
-2. Expand Automatic Enrollment in Retirement Savings Plans
5: Reduce Retirement Account Leakage
6: Simplify Rules for Employers Sponsoring Plans
7: Simplify Disbursements
8: Simplify Taxation of Social Security Benefits

Option Group C: Simplify Taxation of Capital Gains
1: Harmonize Rules and Tax Rates for Long-Term Capital Gains
-1. Harmonize 25 and 28 Percent Rates on Capital Gains
-2. Simplify Capital Gains Taxes on Mutual Funds
-3. Small Business Stock
2: Simplify Capital Gains Tax Rate Structure
3: Limit or Repeal Section 1031 Like-Kind Exchanges
4: Capital Gains on Principal Residences

Option Group D: Simplifying Tax Filing
1: The Simple Return
2: Data Retrieval
3: Raise the Standard Deduction and Reduce the Benefit of Itemized Deductions

Option Group E: Simplification for Small Businesses

1: Expand Simplified Cash Accounting to More Businesses
2: Simplified Home Office Deduction
3: Simplify Recordkeeping for Cell Phones, PDAs, and Other Devices

Option Group F: The AMT
1: Eliminate the AMT
2: Modify and Simplify the AMT


1: Dedicate More Resources to Enforcement and Enhance Enforcement Tools
2: Increase Information Reporting and Source Withholding
3: Small Business Bank Account Reporting
4: Clarifying the Definition of a Contractor
5: Clarify and Harmonize Employment Tax Rules for Businesses and the Self-Employed (SECA Conformity)
6: Voluntary Disclosure Programs
7: Examine Multiple Tax Years During Certain Audits
8: Extend Holding Period for Capital Gains Exclusion on Primary Residences


Option Group A: Reducing Marginal Corporate Tax Rates
1: Reduce the Statutory Corporate Rate
2: Increase Incentives for New Investment/Direct Expensing

Option Group B: Broadening the Corporate Tax Base
1: Provide More Level Treatment of Debt and Equity Financing
2: Review the Boundary Between Corporate and Non-Corporate Taxation
3: Eliminate or Reduce Tax Expenditures
-1. Eliminating the Domestic Production Deduction
-2. Eliminate or Reduce Accelerated Depreciation
-3. Eliminate Other Tax Expenditures
--A. Special Employee Stock Ownership Plan (ESOP) Rules
--B. Exemption of Credit Union Income from Tax
--C. Low-Income Housing Credit


Economic Effects of the Current U.S. Approach
i. Effects on the Location of the Economic Activities of U.S. Multinationals
ii. Effects on the Costs of U.S. Companies and their Foreign and Domestic Competitors
iii. Erosion of the Business Tax Base through Transfer Pricing and Expense Location
iv. The Costs of Administering and Complying with the Current U.S. System

1: Move to a Territorial System
2: Move to a Worldwide System with a Lower Corporate Tax Rate
3: Limit or End Deferral with the Current Corporate Tax Rate
4: Retain the Current System but Lower the Corporate Tax Rate

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