Posted on 04/28/2005 9:02:22 PM PDT by n-tres-ted
On Jan. 7, 2005, President Bush established the bipartisan Advisory Panel on Federal Tax Reform to recommend options for reform of our tax code. I was appointed to the panel along with eight other members, including former Sens. Connie Mack (R-Fla.), chairman, and John Breaux (D-La.), vice chairman. We are about halfway through our process, so I thought I would share our progress to date.
There were a few guidelines we were asked to keep front and center throughout the process. According to the executive order establishing the panel, President Bush wants each of our recommendations for reform to:
* Simplify the tax laws to reduce the costs of compliance and make it easier for taxpayers to plan for the future and manage their affairs.
* Share the burdens and benefits of the tax system in an appropriately fair and progressive manner while recognizing the importance of homeownership and charity in American society.
* Promote long-run economic growth, higher wages and job creation by encouraging work effort and increased savings and investment to strengthen the competitiveness of the United States in the global marketplace. (As you can see in the chart below, savings in the United States has been in a steady state of decline.)
Savings in decline
As of 4Q04. Source: FactSet, Testimony of Dr. Michael J. Boskin, Meeting of the President’s Advisory Panel on Federal Tax Reform, March 31, 2005.
The President also requested that at least one of our recommendations be based on our existing tax system and that our proposals be revenue neutral.
This task is as challenging as it is important. Our muddled tax code reflects years of compromises and quick fixes. History has taught us that although it is relatively easy to achieve consensus on the need for reform, it is much more difficult to devise a solution that satisfies all competing interests.
To develop reform options, we divided our work into two stages. The first stage, now complete, involved a comprehensive examination of the existing tax system to make sure we understood its complexity, impact on economic growth, and relative fairness and unfairness. In the second stage of our work, which we’ve now begun, we will build on our understanding of the current system and consider specific reform proposals, including a consumption/flat tax, a value-added tax (VAT), a consumed-income tax, and a national retail sales tax.
Since Feb.16, we have held seven public meetings across the country. At each, distinguished policymakers, economists and tax experts—including Fed Chairman Alan Greenspan, former Secretary of State and Treasury Secretary James Baker and Nobel Laureate Milton Friedman—shared their views on tax reform. We focused on the challenges facing American families, low-income taxpayers, people facing the alternative minimum tax, and businesses of all sizes. We repeatedly heard that our system is needlessly complex. There’s no greater visual proof of this than the chart below:
A very, very wordy tax code!
Source: Testimony of Fred T. Goldberg, Jr., Meeting of the President’s Advisory Panel on Federal Tax Reform, Feb. 16, 2005.
Increasingly, Americans are looking to experts for help navigating this complexity, with over 60% using a paid preparer to compute their taxes. By the way, no one on our panel of nine does their own taxes. The complexity of the tax code is costing the U.S. economy about $140 billion per year, according to commission estimates that take into account the size of the IRS budget, out-of-pocket tax preparation costs, and the six billion hours individuals and businesses spend annually preparing their taxes. That’s roughly the same as giving $1,000 to every family in America, or the amount of money needed to fund all of the following: the Department of Homeland Security, the State Department, NASA, the Department of Housing and Urban Development, the Environmental Protection Agency, the Department of Transportation, the United States Congress, our federal courts and all foreign aid.
Compliance is a growing problem as well. The IRS recently concluded that the difference between what taxpayers should pay in tax and what they do pay is about $325 billion. The IRS recovers only about $50 billion of this via audits and other enforcement activities. Two-thirds of this “tax gap” comes from the individual income tax, with most of that related to business activities, not from investments or wages. The biggest offenders? The self-employed, partnerships and S-corporations, tipped employees, and gamblers.
One particular problem that cannot be ignored is the rapidly growing reach of the alternative minimum tax. The AMT imposes a stealth tax system that is separate from, but parallel to, the regular income tax system. The AMT was enacted in 1969 to target a small group of high-income taxpayers who were avoiding paying all income taxes. Since then, changes to the AMT and the effect of inflation (since the AMT is not indexed to inflation) have transformed the AMT into a trap for a growing number of unsuspecting middle-income taxpayers. The AMT will catch almost four million taxpayers this year and 20 million taxpayers next year. By 2015, as many as 50 million taxpayers, or about 45% of all taxpayers who pay income tax, will be paying AMT.
In the area of corporate taxes, we heard how our tax code:
* Treats business income differently depending on the type of entity that earned it.
* Treats invested capital differently depending on whether it is debt or equity.
* Treats mergers and acquisitions differently depending on whether the transaction satisfies certain arcane formalities.
Our business tax code is littered with special provisions providing special rates, deductions or credits, which create complexity, volumes of new regulations, opportunities for tax shelters, and unfairness.
Representatives from small businesses also explained to us how entrepreneurs bear disproportionately higher compliance costs than larger businesses. When small businesses were asked in 2001 to list their greatest sources of difficulty, taxes ranked at the top of the list, as you can see in the chart below:
The weight of tax compliance on small businesses
Source: Testimony of David Hurley, Meeting of the President’s Advisory Panel on Federal Tax Reform, March 8, 2005.
Also, the rules that govern the taxation of income earned abroad are easily avoided by the well-advised and a trap for the poorly advised. Preferences in the tax code cause taxpayers to devote more resources to tax-advantaged investments and activities at the expense of more productive alternatives. Reform of our tax code should alleviate this wasteful use of our economic resources and boost economic growth.
Two of our more distinguished witnesses, James Baker and Alan Greenspan, told us that a broad-based, low-rate tax system would provide the greatest economic efficiency, simplicity and ease of administration. It was observed that the wave of tax reform in developed countries around the world during the past two decades reflects the view that low-rate, broad-based, progressive systems are fairer and more efficient than tax codes laden with special provisions that must be subsidized by higher rates on all taxpayers.
Nobel Laureate Milton Friedman spoke to us in San Francisco several weeks ago—one of the biggest thrills of my career. He described our tax system as “a blackboard that has been filled up with so much writing that the slate must be wiped clean.”
* Overall, several themes emerged from the public comments and testimony: We have lost sight of the fact that the fundamental purpose of our tax system is to raise revenues to fund government.
* Tax provisions favoring one activity over another or providing targeted tax benefits to a limited number of taxpayers create complexity and instability, impose large compliance costs and can lead to an inefficient use of resources.
* The complex and unpredictable influences of the current tax system on how families and businesses arrange their affairs distorts economic decisions, leads to an inefficient allocation of resources and hinders economic growth.
* The complexity of our tax code breeds a perception of unfairness and creates opportunities for manipulation of the rules to reduce tax.
* The tax system is both unstable and unpredictable. This volatility is harmful to the economy.
* The objectives of simplicity, fairness, and economic growth are interrelated, and at times may be at odds with each other. Policymakers routinely make choices among these competing objectives, and in the end simplification is almost always sacrificed.
With these themes in mind, we now head into the process of considering specific proposals for reform. These options may include modifying current law, overhauling the existing system, or replacing the current structure and starting over. We will study the major reform proposals that have been offered in the past, as well as new ideas.
Our bottom line is that tax reform should result in a simpler and fairer tax system that will be easy to understand but hard to manipulate. I believe this will allow Americans to feel confident that everyone is paying their fair share.
I will update you all again toward the conclusion of our process, which is slated for the end of July when we submit our proposals to the Treasury Department and President Bush.
Sounds like only one proposal can meet this description: the FAIR TAX ACT OF 2005! What do you think?
I'm nowhere near being a tax expert but consider this:
While a National Retail Sales Tax or something of the sort does kind of sound nice, lets look back to why we had an income tax initally. I'm sure some of you know that it was to fund WWI (I'm pretty sure WWI) and it was at a rate of 1% or thereabout. Now lets take a gander at the situation today; The rate is much higher and moreover we defeated the Germans nearly 100 years ago. The honest thing would have been to end the income tax once the war was over but that surely didnt happen. Now, lets wipe the dust off of our constitution that so many of us rarely look at. Article I Section 9 states that no direct tax shall be passed without some sort of majority from the states. Without being too long winded, check out www.thelawthatneverwas.com. Its the best one i've found on the 16th amendment.
My solution to the problem? A fairer tax code would certainly make life more bearable each year, however, I feel that a national sales tax or what have you would still leave state governments waiting for a hand out (as is most often the situation today). I suggest a FAIR TRADE ACT. This would force the government to:
1. Be more globally competitive
2. Actually care about its constituients(WE THE PEOPLE)
3. Help retain jobs if it wanted to make any money itself
NAFTA and all of these other Free Trade Agreements certainly dont make our nation any more wealthy. What do you think?
Bingo! And Welcome to Free Republic.
I see you have fallen for the propaganda hook, line, and sinker. The current bollixed up (communist inspired) tax system allows the truly rich to pay exactly nothing in income taxes by investing in municipal bonds and many other such tax free devices.
There is only one proper place for the current bollixed up (communist inspired) tax system and that is THE ASH HEAP OF HISTORY which is where I, and a few million of my closest friends, fully intend to see it!
The most encouraging thing about this report is that it gives me the sense that SOME sort of drastic change is coming.
If you would like to be added to this ping list let me know.
John Linder in the House(HR25) & Saxby Chambliss Senate(S25), offer a comprehensive bill to kill all income and SS/Medicare payroll taxes outright, and provide a IRS free replacement in the form of a retail sales tax:
H.R.25,S.25
A bill to promote freedom, fairness, and economic opportunity by repealing the income tax and other taxes, abolishing the Internal Revenue Service, and enacting a national retail sales tax to be administered primarily by the States.Refer for additional information:
Hope springs eternal!
Afterall, it is Spring ;O)
Guess who collects the taxes under HR25. THE STATES!
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