Via Tax Prof Blog, Bloomberg provides this early look at the President's Advisory Panel on Federal Tax Reform's final report to Treasury Secratary John Snow, which is due out this morning:
President George W. Bush's tax advisory panel unanimously backed two alternatives for overhauling the current system that would scrap or curb many popular deductions and tax labor more heavily than investment. The nine-member panel, wrapping up 10 months of work, said in a letter today to Treasury Secretary John Snow that the current tax code is laden with "gimmicks" and "hidden traps," such as the alternative minimum tax, which it recommends repealing. The two proposals would raise about the same amount of money as the current system, the panelists said....
The panel proposed a "simplified income tax" that reduces the number of tax rates to four from six and sets the top rate at 33%, down from 35%. The plan abolishes the alternative minimum tax and one of its triggers -- the deduction for state and local taxes. The plan restructures incentives for homeownership, health coverage and charitable giving. As an alternative, the panel recommended what it called a "Growth and Investment Tax Plan" that resembles a modified flat tax. The plan rewards savings, removes tax incentives to borrow, stimulates business investment, and simplifies tax filing for individuals.
The proposal would reorder tax rules for companies, financial markets and the economy by abolishing deductions for interest paid and allowing companies to fully expense purchases they currently must depreciate over time. Individuals would face three tax brackets for their wage income and would face a 15% tax on all forms of investment income.
The panel made some minor changes to the broad recommendations it outlined on Oct. 18, especially for housing. Interest on only about the first $227,000 of a mortgage in cheaper markets could be used to reduce taxes, compared with interest paid on mortgages of up to $1 million now. For more expensive markets, the cap would be $412,000. The panel recommended converting the current deduction to a 15% tax credit. That means people who don't currently itemize deductions could claim it, though people in higher tax brackets who get a deduction of as much as 35 percent would lose much of their benefit.
Both plans would continue to allow home sales to be tax- free and would increase the exclusion to $600,000 for a married couple from $500,000 now. Panelists discussed, though did not agree on, requiring people to live in their homes longer to get the exclusion. Homeowners must currently live in their homes an aggregate of two of the previous five years to exclude capital gains. The panel agreed to limit the amount of health insurance an employer can provide tax-free to employees to about $5,000 for an individual and $11,500 for a family; the benefit is currently unlimited.
We'll be posting analysis the Panel's report throughout the day, so stay tuned for more.
The President's Advisory Panel on Federal Tax Reform has now released its final report to Treasury Secratary John Snow. Here are the materials:
Cover Letter (PDF)Executive Summary (PDF)Full Report, Chapters 1-4 (PDF)Full Report, Chapters 5-6 (PDF)Full Report, Chapters 7-9 (PDF)Full Report, Appendix (PDF)
Here's the full text of the cover letter:
Dear Mr. Secretary:
President George W. Bush formed this Panel to identify the major problems in our nation’s tax code and to recommend options to make the code simpler, fairer, and more conducive to economic growth. The Panel heard from nearly 100 witnesses and received thousands of written comments. Together, these witnesses and these comments described the unacceptable state of our current tax system. Yet this tax code governs virtually every transaction in the world’s largest economy, affecting the daily lives of nearly 300 million people.
Our tax code is rewritten so often that it should be drafted in pencil. Each year, the tax code is adjusted to meet multiple policy goals – some are broadly shared, but many are not. Myriad tax deductions, credits, exemptions, and other preferences may be a practical way to get policy enacted, but it is a poor way to write a tax code. Whether the government spends more or extends a special tax break, the effect is the same: everyone else must pay higher taxes to raise the revenue necessary to run the government.
During the past few decades, panels have been formed repeatedly, legislation introduced annually, and hearings scheduled regularly to study our tax code and recommend changes. In 1986, a bipartisan effort yielded the last major tax reform legislation. But because of the ever-present tendency to tinker with the tax code, we must redouble our efforts to achieve fundamental reform.
Since the 1986 tax reform bill passed, there have been nearly 15,000 changes to the tax code – equal to more than two changes a day. Each one of these changes had a sponsor, and each had a rationale to defend it. Each one was passed by Congress and signed into law. Some of us saw this firsthand, having served in the U.S. Congress for a combined 71 years, including 36 years on the tax-writing committees. Others of us saw the changes from a different perspective – teaching, interpreting, and even administering the tax code. In retrospect, it is clear that frequent changes to the tax code, no matter how well-intentioned, ultimately undermine the integrity of the code in real and significant ways.
As we moved forward with recommendations for reform, we followed the President’s instructions to emphasize simplicity, fairness, and to remove impediments to growth. Achieving all of these principles is no easy task. We recognized from the start of our meetings that while it is relatively straightforward to point out flaws in a tax system and to express a desire for change, it is much more challenging to settle on a specific solution. There are difficult trade-offs. While we have differed at times and we may not all agree with every word in this report, we all fully endorse it.
We unanimously recommend two options to reform the tax code. We refer to one option as the Simplified Income Tax Plan and the other option as the Growth and Investment Tax Plan. Both of them are preferable to our current system. Both satisfy the President’s directive to recommend options that are simple, fair, and pro-growth.
The Simplified Income Tax Plan dramatically simplifies our tax code, cleans out targeted tax breaks that have cluttered the system, and lowers rates. It does away with gimmicks and hidden traps like the alternative minimum tax. It preserves and simplifies major features of our current tax code, including benefits for home ownership, charitable giving, and health care, and makes them available to all Americans. It removes many of the disincentives to saving that exist in our current code, and it makes small business tax calculations much easier. It also offers an updated corporate tax structure to make it easier for American corporations to compete in global markets.
The second recommended option, the Growth and Investment Tax Plan builds on the Simplified Income Tax Plan and adds a major new feature: moving the tax code closer to a system that would not tax families or businesses on their savings or investments. It would allow businesses to expense or write-off their investments immediately. It would lower tax rates, and impose a single, low tax rate on dividends, interest, and capital gains.
As directed by the President, our recommendations have been designed to raise approximately the same amount of money as the current tax system. The issue of whether the tax code should raise more or less revenue was outside of our mandate. Regardless of how one feels about the amount of revenue required to fund our government, all should agree that the tax system needs a solid and rational foundation.
We recognize that our report is just the beginning of the process to fix our broken tax system. The hardest work lies ahead. As a bipartisan Panel, we have heard from witnesses and elicited proposals from members of both major parties. We hope that the Administration and the Congress will carry forward this spirit of bipartisanship.
The effort to reform the tax code is noble in its purpose, but it requires political willpower. Many stand waiting to defend their breaks, deductions, and loopholes, and to defeat our efforts. That is part of the legislative process. But the interests of a few should not stand in the way of the tax code’s primary goal: to raise funds efficiently for the common defense, vital social programs, and other goals of shared purpose. If we agree the goals serve us all, we must also agree that the costs must be fairly borne by all.
This report aims to give voice to the frustrated American taxpayer and to provide a blueprint for lasting reform. We look forward to a national debate and a better tax system.
Connie Mack III John Breaux William Eldridge Frenzel Elizabeth GarrettEdward P. LazearTimothy J. MurisJames Michael PoterbaCharles O. RossottiLiz Ann Sonders
An amusing story from New Hampshire, via Breitbart.com:
Orford, NH—The one-room cabin David Bischoff built in a cow pasture three years ago has no electricity, no running water, no phone service and no driveway. What it does have is a wide-open view of nearby hills and distant mountains - which makes it seven times more valuable than if it had no view, according to the latest town-wide property assessment. He expects his property taxes to shoot up accordingly.
Bischoff and other Orford residents bitterly call that a "view tax," and they are leading a revolt against it that has gained support in many rural towns in New Hampshire.
State officials say there is no such thing as a "view tax" - it is a "view factor," and it has always been a part of property assessments. The only change is that views have become so valuable in some towns that assessors are giving them a separate line on appraisal records.
Due to changes in valuations, assessment ratios and tax rates, property taxes can increase greatly without a person changing their behavior. This is one reason why they are widely perceived as unfair by taxpayers. See the Tax Foundation’s annual survey of tax attitudes to see what other local, state and federal taxes are perceived as unfair.
Today, voters in Colorado will decide the future of their state’s Taxpayer Bill of Rights -more commonly known as TABOR. Since Colorado voters approved the measure in 1992, both sides of the current debate agree that it has been effective in limiting the growth of government. Opponents of Colorado’s TABOR suggest that it has gone too far and now threatens the future of some programs. TABOR supporters argue that removing the TABOR would be economically damaging by massively increasing taxes and would reward fiscally irresponsible behavior. (You can read current studies here and here)
NBC 9 News in Denver gives an excellent description of ballot initiative C, which would suspend current TABOR protections.
“Referendum C would allow the state to keep all the money it collects for the next five years to spend on health care, public education and transportation projects. A yes vote would eliminate the TABOR refunds that taxpayers receive when the state collects more than it is allowed to spend. The new arrangement would last five years before returning to the refund arrangement under TABOR thereafter.
Referendum C would also take the highest amount of money collected by the state in any year during the next five and calculate state spending from that amount for all future years and allow that amount to increase annually by inflation plus population growth.”
Political analysts say the outcome of the vote is “too close to call”. However, American taxpayers will be closely watching to see if the most effective restraint on government growth will survive this well-financed challenge.
With the President's tax reform panel likely to recommend cutting back popular tax deductions for interest on home loans and state and local taxes, the Associated Press reports on a particularly egregious tax subsidy for traveling state lawmakers that's being ignored:
A little-known tax break specifically for legislators can allow them to save thousands of dollars.
The federal tax code allows legislators who live more than 50 miles from the Capitol a $141 tax deduction for each day they are in legislative session or attending a committee meeting. They also get the tax break when they are home, provided that no more than four days pass between these legislative business days.
The "four-day rule," as some have called it, applies only to state and federal lawmakers who live more than 50 miles from the Capitol ...
The Patriot-News of Harrisburg paid an accountant to compare the tax bill of a legislator with that of a salesman, with both earning the new legislative base pay of $81,050 a year. The legislator would pay nearly $2,400 less in federal and state taxes because of the provision.
...Internal Revenue Service officials were unable to provide an explanation as to who was behind the provision's insertion into the law or the justification for it. (Read the full story here.)
The relevant section of the Internal Revenue Code is Section 162(h) on "State legislators’ travel expenses away from home."
At a time when other federal tax deductions like the one for home mortgage interest are on the tax-reform chopping block, Members of Congress should lead by example and offer up their own special and unjustified tax provisions—which this one clearly is—as first on the list for repeal.
As lawmakers await tomorrow's release of proposals to overhaul the U.S. tax code, the Philadelphia Inquirer recounts a tax-reform success story Congress would do well to emulate: the rise of single-rate tax systems throughout Eastern Europe in the last decade:
Eleven years ago, when this tiny former Soviet outpost was looking to smooth its plunge into the rough seas of the free market, Estonia's upstart leader decided to try something radical: A flat tax on personal income.
Then-Prime Minister Mart Laar, who was 32 at the time, says he really didn't appreciate the extent to which the flat tax - one rate for everyone, with few deductions or exemptions - was lampooned in the West as a right-wing fantasy, a boon for the rich at the expense of the middle class, a throwback to the days before the affluent were expected to pay a higher tax rate on the upper levels of their earnings.
All he knew, he says, is that he had read about the idea in a book by the conservative American economist Milton Friedman, and it seemed fair to him. So, over the objections of his own finance minister and the International Monetary Fund, he pushed through parliament a single, 26 percent income-tax rate with just a handful of deductions.
These days, Estonia is booming, the flat tax gets a lot of the credit, and Laar is considered the father of a tax-simplification movement that has swept through the former communist states of Eastern Europe.
Flat-tax fever has now infected politicians in the prosperous West, and while the idea has suffered political setbacks of late, it's clear that Eastern Europe's success with the flat tax is squeezing Europe's rich countries to reexamine their tax systems. (Read the full piece here.)
Most non-economists find the idea that a simpler tax code can boost economic growth abstract and implausible. Hopefully the experience of the booming Eastern European economies will help dispel that skepticism—and maybe even prompt our own lawmakers to follow Eastern Europe's lead.
A recent story in the Lansing State Journal reports that some officials in Michigan are calling for an expansion of the state’s sales tax to services.
“With state revenue stagnant for years amid a struggling economy and no end in sight, there's a growing chorus of calls for Michigan to follow the lead of some other states and tax services.” Full Story
However, some local business owners are voicing concern over the proposed new tax, on grounds that it would “dissuade their customers and cut into profits.” What’s even more interesting is the fact that many states currently have selective excise taxes on services. For example, although Michigan currently does not tax services as a general rule, tuxedo rentals are taxed. According to the story:
“Arkansas residents pay a tax on tattoos and body piercings. Tummy tucks and hair transplants are among services taxed in New Jersey. And Nebraskans pay a few extra bucks when they hire private detectives or handymen.”
You can read more Tax Foundation research on sales and selective excise taxes here.
Just in time for All Hallow's Eve, tax professor James Maule has a round-up of ghoulish Halloween-related tax stories, including our own contribution "Taxes: the Scariest Thing on Halloween."
Spooky stuff indeed.
The New York Times reports that charitable giving has surged in the wake of a provision in the Hurricane Katrina relief bill expanding the deductibility for gifts:
A little-noted provision in the tax relief package to aid victims of Hurricane Katrina is shaping up as a windfall for charity and a drain on government coffers.
It allows donors who make cash gifts to almost any charity by the end of this year to deduct an amount equal to virtually 100 percent of their adjusted gross incomes, double the normal limit of 50 percent of income. The tantalizing prospect has set off a financial scramble among some wealthy donors and charities vying for their dollars.
"I just keep thinking there's got to be a catch, they can't really be doing this," said C. Kemmons Wilson Jr., a Memphis businessman whose father was the founder of Holiday Inns Inc.
Mr. Wilson said that he and his siblings gave away several million dollars a year and that the amount could double this year because of the provision. "How many sales does the government have?" he said. "This is a big sale, and you bet I'm going to go."
In reality, expanded giving incentives are likely to change the timing of gifts more than the amount. But the real question is: Is a federal tax incentive for charitable giving good tax policy to begin with?
It's popular across the political spectrum, but the economic justification for the charitable deduction is surprisingly uneasy.
For one, its benefits are highly regressive. Second, by shifting part of the cost of private giving onto others, it forces some to subsidize gifts to nonprofits with goals opposite their deeply held beliefs—for example, gifts to pro-choice organizations end up being subsidized by taxpayers with pro-life views, etc.
Finally, the data on 501(c)(3) charities shows many are charitable in name only, receiving most support from local, state and federal government grants rather than charitable gifts.
Here's a table of ten of the largest U.S. charities, showing the amount of government support they received as a percentage of revenue in 2004:
| Total Revenue ($ millions) | Government Support ($ millions) | Government Support as a Percentage of Total Revenue | |
| Mercy Corps International | $116 | $99 | 85% |
| Fred Hutchinson Cancer Research Center | $240 | $189 | 79% |
| Institute of International Education | $158 | $117 | 74% |
| Catholic Relief Services | $500 | $355 | 71% |
| United Cerebral Palsy Associations | $310 | $206 | 66% |
| National Gallery of Art | $141 | $92 | 66% |
| CARE USA | $523 | $332 | 63% |
| Catholic Charities USA | $2,859 | $1,757 | 61% |
| International Rescue Committee | $153 | $90 | 59% |
| Save the Children Fund, Inc. | $241 | $135 | 56% |
Source: NonProfit Times 100 Survey, 2004.
In what sense is an organization that receives 85 percent of its budget from government grants a charity that's subject to market failure without a tax subsidy? It's not obvious.
Pennsylvania property tax relief remains elusive, buried under mountains of red tape. Legislators continue working on their plan to fund education through slot machine revenue while lowering property taxes. In the process, they are unnecessarily complicating Pennsylvania’s tax system.
Act 72, the Homeowner Tax Relief Act, which was signed into law last July, legalized up to 61,000 slot machines at 14 venues, taxed at 34%. Implementing Act 72 is proving difficult due to setbacks ranging from school districts’ refusal to participate to a state Supreme Court challenge. Now there is yet another holdup: the Gaming Control Board has announced that the issuance of casino/slot parlor licenses will be delayed until next spring at the earliest.
As we’ve written before (here and here), Act 72 is complicated and is consuming enormous amounts of time, energy and money. It violates one of the most basic principles of sound tax policy: simplicity. Taxes should be simple for taxpayers to understand, and also for the state to collect. But the most recent slot machine setbacks show that Act 72 is anything but simple. From International Gaming and Wagering Business:
Democratic lawmakers demanded provisions in the original bill ... that the slots be distributed through an in-state supplier. Now, a Democrat representative ... wants suppliers to work in regions of the state—essentially meaning slot manufacturers would have to set up operations in Pennsylvania.
Other ... delays include a lawsuit by the state's police union calling for state troopers to oversee in-depth background checks on casino executives, which the board is currently handling through private firms; only about half (60) of the employees needed to run the state Gaming Control Board have been hired, and there's ongoing debate over who the agency should hire as its head lawyer; and the Supreme Court has struck down a portion of the state's law that took zoning authority away from municipalities and put it under the direction of the board.
Are the trouble and expense really worth it? Perhaps the property tax/education funding issue should be handled the old-fashioned way: through simple increases or decreases in tax rates or spending. But legislators seem determined to take the roundabout way.
As the President’s Tax Reform Panel prepares to release its report, it is interesting to look back at how far the tax code has progressed. In 1963 the U.S. had a top rate of 91 percent on income over $200,000! As recently as 1981 the top rate was 70 percent on income over $107,700.
If the current tax system was the same as it was in 1963, individuals earning over $1,298,285 would pay the top rate of 91 percent. If the current system was the same as in 1981, individuals earning over $235,477 would be hit with the top 70 percent rate.
The consensus prediction is that the panel will release a four bracket income tax system with a top rate in the 33 to 35 percent range. This potential system is infinitely better than those in the past that taxed high levels of income so punitively.
Check out the Tax Foundation's research on the history of the federal income tax here and here.
Who profits most at the gas pump? The answer may surprise you.
We've just released a new analysis comparing the combined profits of the largest U.S. oil companies with state and federal gas tax collections since 1977. Here's the key figure from the analysis:
Figure 1. State and Federal Taxes on Gasoline Production and Imports Exceed Oil Industry Profits in Most Years
Sometimes data really do speak for themselves. Click here to check out the full analysis.
It’s a rare person who doesn’t care about children’s education. Parents and legislators will go to great lengths to find and keep competent teachers. Some attempts are well intentioned but misguided; some are even detrimental to a state's tax system.
Case in point: Arizona State Superintendent of Public Instruction Tom Horne is asking the state legislature to give all public and private schoolteachers, school librarians, school psychologists, and nurses a $2,500 tax credit to attract qualified educators to Arizona. For the average teacher, $2,500 would be the equivalent of a six percent raise. (Read the full story here.)
Some teachers and a few legislators support this proposal, but critics believe Home is simply trying to curry political favor for his 2006 re-election bid. Regardless of his sincerity, this proposal is bad tax policy. Arizona does not currently give tax credits based solely on occupation, and it shouldn’t start now.
Tax credits that benefit a small segment of the population narrow the tax base and make the tax code more complex and less neutral. Taxes should be used to collect revenue—not to implement social policy. Arizonans may value education highly and believe their children are worth the extra money, but the best—and easiest—way to implement that belief is simply to raise teachers’ salaries.
John Wright, president of the Arizona Education Association, has the right idea: "If paying teachers is a priority, put this in the budget."
Last year, the feminist council of Sweden's Left Party made worldwide headlines when former party leader Gudrun Schyman proposed a radical initiative that included—among other things—a "man tax".
The idea was to use tax policy to correct for the supposed "externality" of men's violent behavior toward women, and use the proceeds to fund anti-domestic-violence programs.
Needless to say, the proposal was panned in the media. Now, a year later it appears Sweden's Left Party is paying a steep political price for the radical proposal. From the Times of London:
SPARE a thought for Swedish feminists whose newly formed party is disintegrating after hardliners presented a manifesto advocating a “man tax”, the abolition of marriage and the creation of “gender-neutral” names...
When it was founded six months ago, polls showed that a quarter of voters would consider supporting Feminist Initiative in elections next year because of rising domestic violence against women and higher salaries for men.
That goodwill seems to have faded after the party’s recent founding congress, however, when radicals such as Tiina Rosenberg, a professor of gender studies, appeared to have secured control of the agenda. The resulting platform included proposals for abolishing marriage and changing the law to let people who undergo sex change operations legally alter their names...
The spectacle of militant feminism reaching into Sweden’s official institutions provoked a political scandal in which Wachenfeldt was forced to resign from her job at the shelter.
In new opinion polls only 1.3% of voters said they would vote for the feminist party.
The idea of a "man tax" may seem exotic. But is it fundamentally different from other attempts to engineer social outcomes with tax policy? It's hard to see in what sense a "man tax" is fundamentally different from tax penalties on cigarettes and fatty foods, or tax subsidies for home ownership and child birth. All are designed to steer social outcomes in the direction preferred by lawmakers, not raise revenue efficiently.
Once we become unmoored from the principle that the function of the tax system is to raise revenue—not merely to serve as a system of penalties and benefits to guide social outcomes—there is no limit to the amount of bad policies that can be justified. And as we've written before, the more we ask of the tax code in terms of implementing social policy, the more it ultimately asks of us.
Michigan lawmakers are currently debating ways to improve the state’s economy and business climate. In fact, proposals to fix the state’s major business tax, the VAT-style Single Business Tax (SBT) have been submitted by the Governor’s Office and both houses of the legislature. However, two articles in today's Detroit Free Press discuss alternate ways of spurring Michigan’s economy.
State Senate Majority Leader Ken Sikkema, R-Wyoming, has introduced a new element into the debate over the Michigan Single Business Tax: a provision that would rebate increases in state revenue beyond inflation back to businesses. (Full article here.)
Additionally, another bill proposes to make audits more business-friendly:
House Republicans in Lansing said Monday they'll introduce a package of bills this week designed to make Michigan Department of Treasury tax audits more business-friendly. The bills would, among other things, bar retroactive rule making by the Treasury and give businesses the option of an informal hearing before contesting a tax bill in court. (Full article here. )
These proposals might make Michigan’s business climate marginally better, but they avoid the root of the state’s actual problem. Business is being driven out by the SBT, and until lawmakers fix it, businesses in Michigan will continue to struggle.
Look for the 2005 version of the State Business Tax Climate Index in the coming weeks for more on Michigan’s business climate, as well as the other states.
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