Suitably Flip

Tax Advisory Panel Report Released

The President's Advisory Panel on Federal Tax Reform has published their final report to Treasury Secretary John Snow, detailing the panel's two sets of recommendations for reforming the internal revenue code.

The primary difference between the two proposals is the inclusion of a progressive consumption tax to offset a reduction in the highest tax bracket.

The Tax Foundation provides the accompanying cover letter and executive summary.

Most of the recommendations common to both proposals are sensible and deliver nicely on the panel's mandate to simplify the code and encourage growth.  The panel was also charged with maintaining revenue neutrality in their recommendations, which seems arbitrarily constraining, as tax simplification and adoption of pro-growth, lower rate policies can often be expected to be revenue-enhancing - a pareto efficiency that it seems foolish to preclude.  Further, the net effect of each proposal was calculated statically, meaning the incentives and growth-yielding effects of the policies themselves were not taken into account when estimating their effects, necessarily making them appear more "expensive", assuming they will ultimately be beneficial.

Some of the highlights of the two proposals, along with my humble and hasty take:

Eliminate the alternative minimum tax (AMT)
Unequivocally good.  The AMT has never had a mechanism to keep up with inflation, so as the years have passed since its inception, it's gone from simply punishing wealth creation to punishing middle-income households as well.

Reduce investment taxes
In one proposal, taxes on investment income are lower, but more steeply graduated, compared to the current structure.  In the other, they are left unchanged from current rates, but a provision for their increase in 2008 is wiped out.  Either one should be an improvement.

Reduce mortgage deduction
Bad news.  This discourages home ownership (relative to the current structure) and constitutes a net tax hike.

Eliminate the marriage penalty
Right on.  This is a net tax break and a righting of a pointless contortion of the tax structure.

Disallow state and local income tax deductions
This one is tricky.  If state and local tax authorities stand pat, this will constitute a net tax hike, nationally speaking.  Taxpayers from net donor states (those whose federal tax payments exceed the federal dollars that get allocated back to them - typically the states with big cities, which are typically the blue states) will be on the losing end of this recommendation.  As a New Yorker, this is unappetizing.  But net subsidized state-dwellers ought to see this as a bastardization as well.  Yes, a strong point can be made for the notion that low tax states shouldn't have to subsidize the relative wastefulness (or at least high cost of municipal functions) of high tax states, but on an individual basis, receipt of municipal services really oughtn't be seen as a federally taxable benefit.  A counterpoint to my point is the fact that leaving the deduction in place creates a kind of perverse incentive for states and cities with high tax rates to keep them artificially high, since a portion of the excess revenue is effectively stripped from the federal coffers, rather than from the local citizenry.  But the expectation of bad local tax policy (however justified) shouldn't justify bad policy at a federal level.  Philosophically, it makes sense to be able to deduct one's local tax bill from one's federal tax basis.  So yes, this one is complicated.  If you're on the fence, remember that to eliminate the deduction constitutes a net hike.

Reduce the number of tax brackets
Yes, please.  Good conservative tax policy (in my mind) comes in four flavors: flattening, lowering, simplifying, and (properly) incenting.  This would offer all four (sort of a pro-growth tutti frutti), particularly the proposal that incorporates a consumption tax to offset a move to only three brackets, at 15%, 25%, and 30%.

Simplify savings accounts
Simplicity = good.  IRA's, tuition savings plans, health savings plans, and so on would all have annual caps of $10,000.  I don't know enough about the (nightmarish) complexities of the current systems to know whether that's an aggregate reduction or increase in maximum annual savings, but assuming it's roughly net neutral, the simplification is a good move.

Simplify tax filing
Fewer forms, fewer schedules, fewer worksheets, fewer lines.  Good for everyone but H&R Block.

All in all, not perfect, but definitely striding in the right direction, particularly in terms of simplification.  This ought to make for a good base upon which to heap some non-revenue-neutral reform (primarily more flattening and more lowering).  The kind of reforms that critics looking only at short-term effects will call "expensive", but analysts considering long-term outcomes will herald as healthy, pro-growth, and ultimately quite necessary.

Comments

Tax Advisory Panel Report Released

The President's Advisory Panel on Federal Tax Reform has published their final report to Treasury Secretary John Snow, detailing the panel's two sets of recommendations for reforming the internal revenue code.

The primary difference between the two proposals is the inclusion of a progressive consumption tax to offset a reduction in the highest tax bracket.

The Tax Foundation provides the accompanying cover letter and executive summary.

Most of the recommendations common to both proposals are sensible and deliver nicely on the panel's mandate to simplify the code and encourage growth.  The panel was also charged with maintaining revenue neutrality in their recommendations, which seems arbitrarily constraining, as tax simplification and adoption of pro-growth, lower rate policies can often be expected to be revenue-enhancing - a pareto efficiency that it seems foolish to preclude.  Further, the net effect of each proposal was calculated statically, meaning the incentives and growth-yielding effects of the policies themselves were not taken into account when estimating their effects, necessarily making them appear more "expensive", assuming they will ultimately be beneficial.

Some of the highlights of the two proposals, along with my humble and hasty take:

Eliminate the alternative minimum tax (AMT)
Unequivocally good.  The AMT has never had a mechanism to keep up with inflation, so as the years have passed since its inception, it's gone from simply punishing wealth creation to punishing middle-income households as well.

Reduce investment taxes
In one proposal, taxes on investment income are lower, but more steeply graduated, compared to the current structure.  In the other, they are left unchanged from current rates, but a provision for their increase in 2008 is wiped out.  Either one should be an improvement.

Reduce mortgage deduction
Bad news.  This discourages home ownership (relative to the current structure) and constitutes a net tax hike.

Eliminate the marriage penalty
Right on.  This is a net tax break and a righting of a pointless contortion of the tax structure.

Disallow state and local income tax deductions
This one is tricky.  If state and local tax authorities stand pat, this will constitute a net tax hike, nationally speaking.  Taxpayers from net donor states (those whose federal tax payments exceed the federal dollars that get allocated back to them - typically the states with big cities, which are typically the blue states) will be on the losing end of this recommendation.  As a New Yorker, this is unappetizing.  But net subsidized state-dwellers ought to see this as a bastardization as well.  Yes, a strong point can be made for the notion that low tax states shouldn't have to subsidize the relative wastefulness (or at least high cost of municipal functions) of high tax states, but on an individual basis, receipt of municipal services really oughtn't be seen as a federally taxable benefit.  A counterpoint to my point is the fact that leaving the deduction in place creates a kind of perverse incentive for states and cities with high tax rates to keep them artificially high, since a portion of the excess revenue is effectively stripped from the federal coffers, rather than from the local citizenry.  But the expectation of bad local tax policy (however justified) shouldn't justify bad policy at a federal level.  Philosophically, it makes sense to be able to deduct one's local tax bill from one's federal tax basis.  So yes, this one is complicated.  If you're on the fence, remember that to eliminate the deduction constitutes a net hike.

Reduce the number of tax brackets
Yes, please.  Good conservative tax policy (in my mind) comes in four flavors: flattening, lowering, simplifying, and (properly) incenting.  This would offer all four (sort of a pro-growth tutti frutti), particularly the proposal that incorporates a consumption tax to offset a move to only three brackets, at 15%, 25%, and 30%.

Simplify savings accounts
Simplicity = good.  IRA's, tuition savings plans, health savings plans, and so on would all have annual caps of $10,000.  I don't know enough about the (nightmarish) complexities of the current systems to know whether that's an aggregate reduction or increase in maximum annual savings, but assuming it's roughly net neutral, the simplification is a good move.

Simplify tax filing
Fewer forms, fewer schedules, fewer worksheets, fewer lines.  Good for everyone but H&R Block.

All in all, not perfect, but definitely striding in the right direction, particularly in terms of simplification.  This ought to make for a good base upon which to heap some non-revenue-neutral reform (primarily more flattening and more lowering).  The kind of reforms that critics looking only at short-term effects will call "expensive", but analysts considering long-term outcomes will herald as healthy, pro-growth, and ultimately quite necessary.