By Hecht, Richard L.; Dlugash, Alan J.; Goldstein, Robert L.; Johnson, Janice M.; et al.
The CPA Journal , Vol. 76, No. 10
On November 1, 2005, the President's Advisory Panel on Federal Tax Reform appointed by George W. Bush issued its report, Simple, Fair, and ProGrowth: Proposals to Fix America's Tax System (available from www.taxreformpanel.com). As is typical with any substantive tax proposals, the consequences of the 273-page report are not simple for the average American taxpayer to understand.
Upon the release of the Panel's report, the NYSSCPA's Tax Policy Subcommittee of the Tax Division Oversight Committee decided to study the proposals in detail and prepare an analysis of how taxpayers would be affected. An immediate reaction to the Panel's proposals can be found in "Reflections on Reform," a panel discussion featuring the opinions of several of these subcommittee members that was published in the February 2006 CPA Journal. The NYSSCPA's own proposal for tax reform, the "SET" Tax, was also presented as a white paper in the February 2006 issue.
The current article compares the treatment of taxpayers in different kinds of financial situations under the current federal income tax system to the tax implications under the two proposals made by the Panel: the Simplified Income Tax Plan (SITP) and the Growth and Investment Tax Plan (GITP).
Goals for Reform
When President Bush created the Panel in January 2005, his stated purpose was the development of recommendations and options for fundamental tax reform. A tax subcommittee of the NYSSCPA decided to examine the Panel's substantive proposals to provide useful information to decision makers and the public. The need for reform is obvious, even if the politically acceptable solution has so far proven elusive. This analysis is policy neutral and is designed to explain how the Panel's proposals would affect individual taxpayers in different circumstances.
The President's Panel claimed that current tax provisions provide targeted tax benefits to a limited number of taxpayers while creating complexity, imposing large compliance costs, and using resources inefficiently. The Panel favored using a broad tax base while allowing certain popular deductions and credits, thereby retaining the progressive nature of the current tax system.
The need for greater transparency and simplicity is commonly found in the vocabulary of tax reform. Many share the view that, under current tax law, individuals and businesses cannot easily understand their own tax obligations or be confident that others are paying their fair share. These conditions have led to diminishing public support for the current tax system.
The Executive Order establishing the President's Panel included the following directives:
* Make the tax code simpler, fairer, and more conducive to economic growth.
* Recognize the importance of home ownership and philanthropy in American society.
* Maintain "revenue neutrality." This means that reform proposals must collect the same amount of estimated revenue as projected under existing law. Thus, if some taxpayers would pay less, others would have to pay comparably more.
* Permanently retain the 2001 and 2003 tax cuts that included reductions in the tax rates (to a maximum of 15%) on dividend income and long-term capital gains. The current tax rates on dividends are scheduled to expire at the end of 2008.
* Assume that the increase in the aternative minium tax (AMT) exemptions for the years 2003 through 2005 would lapse at the end of 2005. (Congress has since extended these increased exemptions to 2007.) This assumption increased the amount of tax revenue needed if the Panel's proposal was to repeal the alternative minimum tax (AMT) while remaining "revenue neutral."
* Maintain the same tax burden on the various income "strata" of taxpayers as exists under current law. This means that taxpayers in specific income groups should not pay more or less income taxes, as a group, than they do now.
Summary of the Tax Panel's Proposals for Individual Taxpayers
The Panel devised two plans to meet the President's goals: the Simplified Income Tax Plan (SITP) and the Growth and Investment Tax Plan (GITP). …