Federal Tax Reform Panel Makes Recommendations

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The President's Advisory Panel on Federal Tax Reform presented its recommendations this week. Convened to find simpler and economically effective ways to streamline the nation's current tax code, the nine members have completed their task well but the controversy has only started.

The panel was co-chaired by former senators Connie Mack (R-Florida) and John Breaux (D-Louisiana). In a letter to Treasury Secretary John Snow, the panel wrote, “The effort to reform the tax code is noble in its purpose, but it requires political will power. Many stand waiting to defend their breaks, deductions and loopholes, and to defeat our efforts.”

BusinessWeek reports that the current tax code comprises more than 60,000 pages and has grown 48% in the past nine years according to the Cato Institute. Taxpayers hiring a professional to help them with their taxes increased from 50 percent in 1995 to 62 percent in 2003.

While the panel did not recommend radical changes such as a flat tax or a national sales tax, they did recommend plans going in two different directions. The simplified income tax system is the more realistic alternative while the consumption-based plan may be less viable. Both recommendations drew immediate criticism.

Individuals under these changes would see worksheets and schedules going from 52 to 10 and the six current tax rates would decrease to four with a top rate of 33 percent. The panel also estimates that 75 percent of all taxpayers would be in the 15 percent tax bracket according to BusinessWeek.

The wealthy would pay a higher percentage than lower income earners. The tax base would be broadened under this plan to account for the elimination the Alternative Minimum Tax. The marriage penalty would also be eliminated with one family credit replacing personal and family tax breaks.

Mortgage interest on loans up to $1 million is fully deductible currently but under the new plan, the deduction would become a credit equal to 15 percent of the mortgage interest paid. The allowable amount of the mortgage would be determined by the Federal Housing Administration loan limitation that varies by region. The current regional ranges go from about $227,000 to $412,000 according to the Associated Press.

The current array of retirement savings instruments would be reduced to three. They would be Save at Work, Save at Retirement, and Save for Family. Save at Work would function like a current 401(k) using pretax dollars. The Save for Retirement would function like an expanded Roth IRA. $10,000 in after-tax dollars could go into these accounts and would be withdrawn tax-free at retirement. Save for Family replaces education and health saving plans. Contributions would be limited to $10,000 and up to $1,000 could be withdrawn annually without penalty or explanation.

One group critical of these three savings plans is the American Society of Pension Professionals and Actuaries (ASPPA). The presidential panel has recommended the elimination of tax incentives for annuities. In a prepared statement, Brian Graff, ASPPA's Executive Director/CEO, said, “It is frankly irresponsible to suggest eliminating this critical means of ensure that retirees will have enough money to live on.”

Also given that a business-owning couple could contribute up $40,000 into their Save for Retirement and Save for Family accounts, Graff also said, “Many small business owners will forego adopting a workplace retirement plan if they can save that much on their own on a tax preferred basis.”

According to BusinessWeek, most political groups seem to hate these plans in some way. For example, right wing conservatives are recommending a national sales tax replace the current tax system but this alternative was also examined by the panel. They determined that such a tax would need to carry a rate of 87 percent to be revenue neutral as was the order of the White House to the current tax reform panel.

Charles Grassley (R-Iowa), chairman of the Senate Finance Committee, spoke to the Associated Press about the political unpopularity of these decisions and said, “But it's important to have a comprehensive starting point that will get everyone talking and thinking.”

The AICPA has prepared a report on tax reform titled, Understanding Tax Reform: A Guide to 21st Century Alternatives. It presents a balanced view of the different tax reform plans surely to become political lightning rods in our near future. Read the report at www.aicpa.org/taxreform.

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