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What would you give up for tax reform?

Making the tax code less complex would mean creating new groups of winners and losers. Does Congress have the guts?

By Teresa Mears Jan 20, 2011 3:51PM

This article is by Stephen Ohlemacher of The Associated Press.

 

Nine in 10 Americans will find the maze of credits, deductions and exemptions on their tax forms so confusing and difficult that they'll hire someone or turn to special computer software to fill out their returns. Even the commissioner of the Internal Revenue Service says he pays someone to do his taxes.

President Barack Obama and key lawmakers from both political parties say it's time for a serious national discussion about making the tax code simpler and fairer. It's going to be a long talk, one that could last years. Why? Because every deduction, exemption and credit, every layer of complexity, is important to somebody, in some cases millions of somebodies.

 

"That's what the tax code is now, it's a whole set of winners and losers," said Howard Gleckman, a fellow at the Urban Institute and editor of TaxVox, a blog on tax issues. "If you reform it, you're going to create new winners and new losers, and the losers always scream much louder than the winners cheer."

 

There is a lot of political support on Capitol Hill for simplifying the tax code. But in the new era of divided government, it is unclear whether Obama has the ability, or the political will, to steer such a massive piece of legislation through a Republican-controlled House and a deeply divided Senate.

 

"We're examining whether we can find the political support for a comprehensive tax reform," Treasury Secretary Timothy Geithner said at a recent economic forum.

 

The Senate Finance Committee started holding hearings on tax reform last year, and chairman Max Baucus, D-Mont., plans more this year. The House Ways and Means Committee held its first hearing on the issue Thursday.

 

"I am under no illusion that the task before us will be easy," said Rep. Dave Camp, R-Mich., chairman of Ways and Means. "To really reform the tax code in a way that lowers the tax rate, broadens the base and promotes the competitiveness of American companies, we will need to make some tough choices."

 

Congress isn't used to making tough choices when it comes to taxes, said Eugene Steuerle, a former Treasury official who worked on the last tax reform package that passed Congress, in 1986. For much of the past decade, lawmakers have simply borrowed to pay for spending projects and tax cuts.

 

"Most of the members of Congress have never engaged in legislation that identified the losers -- who's going to pay for government, who's going to pay to get the budget in order," Steuerle said. "They're not used to that type of legislation."

 

The tax code is 3.8 million words long and growing. In the past decade, there have been 4,428 changes -- an average of more than one a day, according to a recent report by Nina E. Olson, the National Taxpayer Advocate, an independent watchdog within the Internal Revenue Service.

 

"In my view, the tax code today is a mess," Olson told the Ways and Means Committee hearing. "Since the last major reform 25 years ago, the tax code has become an ever-expanding patchwork of discrete provisions, often with little logical connection, and it has become unreasonably difficult for taxpayers to understand."

Camp has his own description: "The tax code is 10 times the size of the Bible, with none of the good news."

 

The tax code has long been a vehicle for social policy. Lawmakers use it to reward people for having children, buying a home and making donations to charities. There are even tax breaks for paying taxes. Businesses are rewarded for investing in new equipment and buildings, spending on research and development, and producing alternative forms of energy.

 

In all, the tax code is filled with a total of $1.1 trillion in credits, deductions and exemptions, an average of about $8,000 per taxpayer, according to Olson's analysis of data provided by the nonpartisan Joint Committee on Taxation, Congress' official scorekeeper on revenue issues.

 

For perspective, the federal budget deficit was $1.3 trillion last year, which raises another thorny issue: Should tax reform be used to increase overall tax revenues to reduce the deficit? Many politicians, both Democrats and Republicans, say trying to use tax reform to raise taxes would only make it harder to build support for an overhaul.

 

Obama has repeatedly said he wants to simplify the tax code by broadening the tax base and lowering the tax rates. That means reducing the number of credits, deductions and exemptions -- for businesses and individuals -- so lawmakers can lower the overall tax rates while still raising the same amount of tax revenue.

The law is packed with tax breaks that help narrow special interests. But, Olson points out, many of the biggest tax breaks benefit millions of American families at just about every income level, making them difficult to touch.

 

In 2009, nearly 35 million taxpayers got a tax break for paying interest on their home mortgages, and nearly 36 million taxpayers took the $1,000-per-child tax credit.

 

About 41 million households reduced their federal income taxes by deducting state and local income and sales taxes from their taxable income.

 

"The dirty little secret is that the largest special interests are us -- the vast majority of U.S. taxpayers," Olson said. "Virtually all of us benefit from certain exclusions from income, deductions from income, or tax credits."

 

Biggest U.S. tax breaks

 

The tax code is filled with a total of $1.1 trillion in deductions, credits and exemptions, an average of about $8,000 per taxpayer, according an analysis of tax data from 2009. Last year's federal deficit was $1.3 trillion.

 

Among the biggest tax breaks:

  • 34.6 million taxpayers cut their federal income taxes by a total of nearly $77 billion by deducting the interest they paid on their home mortgages.
  • 36 million families saved more than $54 billion from the $1,000 per-child tax credit.
  • 40.7 million taxpayers cut their federal income taxes by $40 billion by deducting state and local income, sales and personal property taxes.
  • 33.5 million households cut their taxes by $21 billion by deducting state and local real estate taxes.
  • 36 million families cut their taxes by nearly $35 billion by deducting charitable donations.
  • 28 million taxpayers saved a total of $24 billion because their income from Social Security and railroad pensions was untaxed.
  • 25.7 million low-income families got a total of $55 billion from the earned income tax credit.

Source: Joint Committee on Taxation.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

 

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18Comments
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Give people 100% of their paycheck and collect at point of purchase.  No other taxes.  No deductions.  What people continue to overlook is that corporations don't pay taxes they collect them in their prices.  Wipe out corporate taxes and prices will drop.  Business will be encouraged to develop and grow and will not spend money on figuring out how to avoid taxes.  Charities that deserve support will continue to get it & those that have undeservedly garnered support because of the tax benefit will cease to exist.

The IRS will exist only to audit the businesses that are supposed to be collecting.  Fraud will easily be detected and severely punished. 

The guy who buys a Mercedes will pay more tax than the guy who buys a KIA.  The family that buys caviar will pay more tax the family that eats fish sticks.  The family that eats at McDonald's will pay less tax than the family that eats at Ruth's Chris 

It is the ultimate in fairness and once people see what their economic value is(when they get their whole check)  they will fiercely resist a Congress that tries to take it away in the form of higher taxes.  Since the only way to raise revenue is for sales to grow-the government will be incentivized to do the things that help business develop instead of all the speed bumps they put in the way now.

Foreign investment will pour dollars into our economy and will we once again have a thriving economy based on real production vs. the falsely created bubbles that have given us false security for the last 20 years.

Lastly, EVERYONE WHO PLAYS-PAYS!

Jan 24, 2011 10:46AM
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Good call Ron St Clair. A sales tax is the fair way to do taxes. For starters, it is much harder to avoid paying your share. It gets rid of the marriage penalty. No sales tax on food, utilities, and housing. Why? Simple. There are people that are poor and don't have any income beyond the basic necessities of life. This is their way to live tax-free. If you go out and start buying non-necessities, you are going to pay taxes. This would cut the size of the IRS by 75% with the 25% auditing the collection of sales tax. It would be a perfect system.
 
Make Social Security optional again, as it was intended to be.

Our situation is not hard to fix. It just takes a real leader to stand up and make the changes no matter how hard or unpopular they are. Cutting benefits is hardly ever popular with those enjoy living off MY TAX DOLLARS but it needs to be done.

Jan 25, 2011 10:36AM
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Scrap the current system and go with a National sales tax! That way everybody pays their share.  Right now there are too many not paying any taxes yet reaping all the benefits.
Jan 21, 2011 1:03PM
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Don't just simplify it -- flatten it.

 

Quit trying to figure out how you can continue to manipulate people's behavior and still have enough to fund all your pet projects.

Jan 24, 2011 3:48PM
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tax sales

and double tax sales on foreign goods

Jan 26, 2011 1:39PM
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I have none to give up I take the standard deduction now. What's left to give.
Jan 28, 2011 1:58PM
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Everyone should pay the same amount and necessities are exempt.  Food, Medicines. Medical and Dental and Water.   States should do the same.   Reform the Appropriation Committee's   Percentage Chart, cut out a lot of Foreign Aid.  We need it here and it should never be over aid given to our citizens.

 

1.  6% sales tax on every single thing made in the USA.

2.  10% sales tax on all imported items.

3.  Get rid of the Business Licenses that hold back entrepreneurs from starting small businesses..

4.  Get rid of the permits that  are so costly on remolding and improving businesses and homes.

      (exp  $250.00 permit to replace a hot. water tank in a mobil home with same model)

 

      These are the things that hold our businesses and private enterprises from going forward.

The taxes would be fair only if a percentage is returned to the municipality from where it originated. 

 

Create competition by breaking up monopolies of the Banks and Insurance companies.

Make credit reporting companies correct their method of reporting .  The way it is now is hurting many entrepreneurs because of their false entries and stolen identities.  The person has to prove its a wrong item, not the  company that sent in the item.  Again, it is the individual  has to prove their innocence.

Jan 26, 2011 7:36PM
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The first thoughts of a "National Sales Tax"  or "Value Added Tax" sounds good BUT  do you homework and check out how much people pay in England, Japan, other countries that have it. 

They start our at 7 or 8% but in a few years, we would see 17 to 25% and that would be on each time something is sold.  It something go's from the ground to and ends up to the consumer is probably will be taxed 5 to 10 time.  (EACH TIME A SALE IS MADE) 

Do you really beleive the system would have any real controls? 

How about a national vote as to the percentage and the Gov. has to have a true balanced budget.

In a nut shell downsize the Government.  With all the electronic/web tools it should take less people not more.

Jan 21, 2011 6:48AM
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And another 75 million "tax payers" don't pay any taxes at all, so take no deductions or credits
Jan 24, 2011 7:12PM
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The problem is none of the advocates for simplifying the tax system want it simplified: they want it scrapped and replaced with something more appealing to them.  Think about it.  The fact that the tax code is progressive is not what makes it complicated.  It's 5th grade math at hardest that could be replaced by a simple app or spreadsheet.  But people with personal motives get involved and feel that flat or comsumption taxes are the way to go not to simplify things, but because they feel it'll put them in a better position than a progressive system.

 

The tax code developed into the monster it is from a simple thing, so I have no reason to think any new system won't make the same mistake over time.  The exceptions will get into the flat tax and complex valuation ruels will get the consumption tax and we'll be back to square one.  My tax policy proff said it best: we'll never have a simple system as long as there are vested interests in not paying taxes at all.  They just won't let the system be.

Jan 25, 2011 3:18PM
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Everything:

 

There was a fictional example my tax proff started the course off with.  Simply put, it was some guy having his company pay his expenses directly and claiming he had no income because he never received cash.  Stuff like this led to a simple concept like "income" to evelove into what was at the time and eleven paragraph sentence, not to be intentionally confusing, but because if the term "income" wasn't expressly defined in hard legalese into the value of all godds and services received and rules how to value them, people would try any method of wordplay to say they had less or no income than actually received.  As he defined it: simple and unclear rules are the easiest to break.  Other times, as with dividends or capital gains, the excuses seemed valid and new rules were added for new exceptions.

 

You see, I don't entirely doubt the intent of other plans to simplify the tax system, but I'm more inclined to think we're the ones that broke it because we'd rather a system be complex and bennifical to us than simple, and as such, we're likely to corrupt any new system no matter how simple we make it.  We don't want a lot of hard rules, but we don't want to sit quietly and live with it when we're hurt by the simple ones, and you can't really blame the rulemakers for trying to apease the whiners and catch the cheaters.  I've just outlined a few of the fresh problems a flat tax will bring, and the same thing will happen to sales taxes (catching and valuing barter transactions alone) and neither deal with the realy hard tax stuff: reconciling international income and sales taxes.  Maybe I am overly cynical, but I'm distrustful of any proposed tax plan put forth by someone not clearly stating they'll be in a worse financial postition after the change but they're willing to live with it.  Isn't that the question at the top of the page?  What benefit are you willing to lose to make the system simpler?

Jan 21, 2011 1:52PM
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I have read several times that 47% pay no federal tax, so it stands to reason that they do not pay much of any tax. If they were drawing food stamps or welfare that would mean that the tax-payers are picking up the sales tax and other taxes also which some people claim that they pay. Simple

Jan 21, 2011 1:01PM
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Why not repeal the 16th amendment?

This would:

1)vacate federal buildings across the US and territories.

Benefit: save energy, furnishings, paper, copiers, cleaning crews, maintenance, rent to private sector.

2) Eliminate all federal employees in IRS positions:

Benefit: payroll,  accounting, data processing, time cards, paperwork, human resources, etc.

3) Eliminate all IT Departments associated with this monstrosity.

Benefit: no need to update IT departments with new personnel, equipment, clean rooms, etc.

4) Industry of tax attorneys, specialist, enrolled agents, etc. dries up and goes away.

Benefit: freedom

5) Eliminate federal Court buildings associated with the IRS

Benefit: no more hearings, proceeeding, criminal activity, RICO, racketeering charges, etc.

There's more...this is a great start, tho'. Oh! yes, replace all this with a 17% Flat Tax...simple.

Imagine the savings in paper, energy, automobiles, vending machines, cleaning crews, maintenance, landscapers, machines, fork lifts, trucks, support pesonnel, outsourcing.

Jan 24, 2011 10:33AM
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Tax reform is needed. I do our taxes and it is a bunch of loop de loops that end up zeroing each other resulting in about a 15-17% income tax. Been that way for years at our income level. It seriously helps to be or have been a computer programmer to do your own taxes. One sees the loops.
Apr 28, 2011 3:44PM
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Us NAVY  You get a lot of tax breaks. Do not try to fool people. The  food subsistence, clothing allowance, quarters allowance among others that are not taxed. That other people have to buy out of their pay. I had to pay my housing, food and work clothes out of my pay. 
Jan 27, 2011 4:56PM
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I'll gladly give up mortgage deduction and charitable deduction (which I do take), if they also take the child credit and EITC off the table too.

I do not think we should remove deductions for money used to pay taxes. There should be a concerted effort to ensure that we only pay taxes once. In fact, they should expand the number and types of taxes you can write off to include things like vehicle registrations and gas taxes.

Jan 25, 2011 12:04PM
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Redd, your cynicism is unwarranted.  Right now it is every man for himself because that is exactly what the system encourages ("how can I play these rules to my advantage?").  We're all better off when the tax code isn't a game.  And they don't have to get back in, unless we fail to hold anybody accountable...make it so transparent that such attempts are obvious, and refuse to consider them.
Jan 21, 2011 9:19AM
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morr is probably referring to taxpayers who don't pay federal income tax. The vast majority of taxpayers do pay net federal taxes, because of payroll taxes. Furthermore, these folks will pay state and local taxes as well. morr is insinuating that a lot of people are free riders and should pay up. Guess what, the great majority of Americans pay taxes - best to get more familiar with tax policy before throwing numbers around. Those who do not pay any net tax are very, very poor. For example, my wife and I made about $24,000 last year and we paid about 15% in net Federal income, payroll and state income taxes. Anyone who didn't pay taxes was a lot poorer and/or living in states without an income tax.

The list above omits the value of the tax break from retirement savings. I can't remember how much it is, but it is quite a lot, close to what the mortgage tax break is. Ditto the exclusion of health insurance from tax.

Most of the tax breaks on the list are regressive in that they benefit high earners more. For example, few people, and mainly higher income people, itemize deductions and benefit from things like the mortgage deduction, the state and local tax deduction, etc.

As to what I'd give up, I would quite frankly be willing to give up most of the tax deductions. The Earned Income Tax Credit and Child Tax Credit should stay - the former obviously benefits lower income families, the latter benefits lower and moderate income families and helps them get childcare so they can work. Quite frankly, I'm making a lot more this year and I do expect that I'd otherwise benefit significantly from these tax breaks. But the country spends a lot of money on these tax breaks. One of the key lessons from the Fiscal Commission report was that if we eliminated all tax breaks, we could actually reduce the tax rates while collecting more tax revenue.

Now, the Fiscal Commission was too regressive for me. People who earn more - and I expect to be in this crowd - should pay more, and the plan spread the pain evenly among all the income brackets. However, like I said, I think all the tax breaks the article listed should be phased out.
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