CPA Journal Panel
Discussion on the SET Tax Proposal and Report of the President’s
Advisory Panel on Federal Tax Reform
2006 - In 2005, the NYSSCPA established a special Committee
on Practical Reform of the Tax System, chaired by David A.
Lifson and comprising Joseph L. Charles, Alan J. Dlugash,
Robert Goldstein, Laurence Keiser, Leon M. Metzger, Stephen
A. Sacks, and Maryann M. Winters. The committee was charged
with developing a policy for the reform of the U.S. tax system,
and its work culminated in the SET Tax, a simple, exact, and
transparent alternative to the current tax system. The paper
was adopted as an official policy position of the NYSSCPA,
and it appears in its entirety in this issue, beginning on
page 14. Since its adoption, the proposal has been discussed
in interviews with CNBC, “ABC World News Tonight,”
NY1, Bloomberg News, Forbes, Fortune, Newsweek, BusinessWeek,
the Wall Street Journal, the New York Times,
the Washington Post, the Financial Times,
and Accounting Today.
the panel discussion that follows here, committee members
explain their work on the SET proposal and their reactions
to the Report of the President’s Advisory Panel on
Tax Reform, released in November 2005 (Analyzed in a separate
article on page 42). The panel discussion, on November 18,
2005, also included the chair of the NYSSCPA’s Tax
Division Oversight Committee’s Tax Policy Subcommittee,
Richard Hecht, and was moderated by Louis Grumet, NYSSCPA
Executive Director and Publisher of The CPA Journal.
Measuring Stick for Tax Reform
Grumet: Recently, the Panel that was appointed
by President Bush to look into tax policy and the entire
tax system completed its task, announcing two alternative
proposals: the Simplified Income Tax Plan [SIT] and the
Growth and Investment Tax Plan [GIT]. The provisions for
individual income taxes are similar, but they differ significantly
in their treatment of dividend, interest, and capital gains
income, as well as the treatment of businesses. The Panel’s
conclusions would represent a significant change to the
Tax Code, but I leave it to this group to discuss whether
those changes would be good or bad, fundamental or incremental
of the people sitting around this table spent months developing
a measuring stick against which to view those proposals.
The NYSSCPA’s Committee on Practical Reform of the
Tax System called the resulting proposal the SET [Simple,
Exact, Transparent] Tax. What do you think of the conclusions
the Presidential Panel came to, and how do they compare
to the conclusions this committee came to?
Keiser: I think to get to this type of tax
reform the Presidential Panel had to first conclude that
a consumption tax or a VAT [value-added tax] was not going
to work. At that point, they decided to focus on changing
and simplifying existing law.
Why wouldn’t a consumption tax work?
Goldstein: Because it’s terribly regressive.
In 2001, Pamela Olson, who was then Deputy Assistant Secretary
of the Treasury for Tax Policy, did a good analysis of the
varying tax systems. The analysis looked at the existing
tax system, as well as alternatives, including consumption
taxes like the “traditional” flat tax, a national
sales tax, and a VAT, which is a sales tax of sorts. Olson
demonstrated that every country in Europe that had a value-added
tax also had an income tax because the VAT rate became extraordinarily
high if it was to replace the income tax. I think her analysis
also clearly demonstrated the regressive nature of consumption
taxes. It seems common sense that somebody making several
million dollars a year spends a lower percentage of their
income on necessities than someone making $40,000 or $50,000
a year. I think this committee—and the President’s
Panel—therefore came to the conclusion that consumption
taxes alone wouldn’t work.
J. Dlugash: Although I agree that we came
to the conclusion that reform based on the current income
tax was the way to go, it is not clear to me—and I
don’t think it was clear to the President’s
Panel—that consumption taxes may ultimately turn out
to be better. A concept such as the “Fair Tax,”
[a respected version of a consumption tax] really focuses
on the regressivity and adequately deals with the issue.
But a consumption tax certainly would be such a major change
from the current system that, even if it was decided that
a consumption tax was the better way to go, getting there
would be very difficult. But I don’t think we should
dismiss it out of hand; the concept bears looking into for
L. Charles: I think the big issues with a
consumption tax were the uncertainty and the costs to transition
from one system to another. Another thing is that the economists
and other experts say that our system is still the envy
of the world, in terms of our 85% compliance rate. [Although
it is very difficult to estimate, the IRS puts the noncompliance
rate at 17.5% to 20.1%; 15% is the generally cited figure
from a recent study.]
In most countries, you end up with a negotiated rate and
a negotiated level of compliance—and I don’t
mean just Third World countries.
How does the SET proposal compare to a flat
A. Lifson: The so-called “flat tax”
proposals have been attempts to broaden the base and eliminate
deductions. The SET Tax system is a single-rate progressive
tax system. It allows you to tax lower incomes at effectively
lower rates by excluding a portion of those incomes from
the single tax rate. A SET Tax system is not a flat-tax
system within the jargon of tax reform, or a flat tax as
is generally understood by the public. Most flat-tax proposals
studied by the President’s Panel and the press are
efforts to increase the tax base and lower the tax rates,
which tends to create a more regressive tax system.
Perhaps this is oversimplifying it, but what the SET Tax
does is exclude lower-income people through personal exemptions,
but taxes the income above some level at a single rate.
Yes, but a close look would show there is
a gradation in the effective tax rate, just like with our
current tax policy, but there is no gradation in the tax
rate itself. For example, 50% of income at a certain band
might be excluded, effectively creating a third, 17.5% bracket
(along with a 0% and a 35% bracket), but through an exclusion
rather than through a rate table. The whole principle of
this flat-tax system is to change the complicated calculus
of today’s system by simply using the single, highest
rate to tax all taxable incomes—call it 35%, to emulate
the current tax system—and to create progressivity
by excluding portions of income to replace the multiple
rate tables and
I would like to focus on the differences, because I don’t
like totally dissociating with the flat tax. The concept
of a flat tax is generally associated with the concept of
fairness, because of the lack of deductions and special
benefits, and that is part of the SET Tax system as well.
I don’t perceive regressivity or progressivity to
be a difference, because in both the flat tax and the SET
Tax that can be adjusted.
are different kinds of flat taxes. The big difference between
the SET Tax and more traditional flat taxes is that with
the SET concept we’re not proposing that deductions
of any sort not be allowed. The SET Tax has the same transparency
as a flat tax, but our system has built into it the possibilities
of deductions and different rate schedules, a flexibility
that the flat tax was not intended to have. If the SET Tax
were taken in a very libertarian direction, with no deductions,
then it would look like the flat tax.
In other words, the SET Tax is a transparent
system with a single tax rate that is adjusted through exclusions
to achieve progressivity—whereas the traditional flat
tax as proposed by Steve Forbes has almost no adjustments
and therefore a much higher rate of regressivity.
Because our committee was named the Committee
on Practical Tax Reform, we wanted to submit a proposal
that provided some flexibility, so that Congress would look
at it and realistically consider it.
Exclusions and Achieving Fundamental Reform
Explain the exclusion concept in the SET Tax and contrast
it with the Presidential Panel’s proposal, because
that’s a core difference.
The President’s Panel left in place
the entire tax system and simplified the elements of it.
Frankly, they made a noble effort. Had they “sugar-coated”
their proposal by replacing the current system with a simpler,
SET-type tax system, the Panel would have been able to promote
profound, long-lasting change. They did much of the heavy
pruning that the Code desperately needed; all that’s
left is to encase it in the SET system and debate the final
details! The combined changes would surely last for a long
time, and give the American public a transparent system
with easy-to-follow ground-rules for making further changes.
example, with every tax policy change they proposed—such
as simplifying the many forms of retirement benefits into
one or two accounts—the Panel did the heavy lifting.
If they had put those simplified solutions into the SET
Tax system as exclusions, then when somebody goes to change
the policy next year, it would be a transparent change that
everybody can understand.
I agree with David; I think the President’s
Panel took the existing tax system and modified it. They
simplified it, but the existing tax system remained the
basis. They didn’t change the basic philosophical
approach to the tax system. Conceptually, they fell down
Hecht: I disagree. When you look at the tax
changes to dividends, capital gains, and interests, those
were major, fundamental changes.
I agree that they’re significant changes,
but they’re not much different than the changes introduced
in the 2001 and 2003 tax acts. The Presidential Panel’s
proposal would be a radical change, but it would not be
a conceptual change. Some changes would be for the better,
such as the simplified retirement and savings accounts,
but it’s still just tinkering with the existing system.
It includes a lot of steps in the right direction; it moves
toward simplification and fairness. That said, certain principles
need to be more sufficiently addressed. Even if the SET
Tax is not going to be adopted in the short term, we can
still have an impact. If something incorporating some or
all of these principles is going to go forward, we should
try to influence the process. The sad part of the President’s
Panel is that it could have put the exact same tax law in
effect through a SET framework that would have been more
simple, more transparent, and easier to change—all
of the pluses, none of the minuses—and the Panel dropped
Cost of Citizenship
Can you explain the decision in the SET system to tax all
income at a single rate?
By choosing the highest rate rather than the lowest rate,
we’ve provided for a progressive tax system through
exclusions of income. Through the exclusions we created
rate tables, we created deductions, we created exemptions,
we created everything that the current tax system does—but
we did it all in one place, so that for 75% of the population,
the calculation should be reasonable and appropriate. Filing
your taxes should be no harder than passing your driver’s
What you’re saying is that taxes are
a cost of citizenship. And as a cost of citizenship, it
should be understandable to and participated in by everybody.
As we envision it, everybody has to fill out
a form, whether they owe money or not, and the reason is
so that everybody can see their share of the cost of government.
Quite transparently, by the use of exclusions, everybody
would be able to understand what benefits they are receiving
from their government—in other words, what income
is not being taxed. Taxpayers beyond a certain income level
should indeed be able to figure out a complicated exclusion
to account for a complicated financial event. But for the
bulk of taxpayers, the SET system really is an extraordinarily
transparent way for the Congress to make whatever social
decision it wants.
example, if somebody wants to start a business in a foreign
country, the exclusion on taxing income of their foreign
business would be quite complex, as it is under the current
tax system. Unless it’s not Subpart F income, income
in a foreign corporation would be completely taxable. So,
under the SET system, you would keep the same rules for
foreign income, you would just turn them 180 degrees. But
if they engaged in complicated behavior, they should be
able to factor the tax consequences into their decision-making
process. On the other hand, things like simply buying or
selling a house shouldn’t be too complicated, and
tax benefits delivered through the system to homeowners
should be easy to measure and understand.
SET system has no tax-policy goals. It is tax-policy transparent.
It is simply a mechanical approach to make tax policy visible.
You could create all these exclusions to emulate the current
system, and, in doing so, analyze what in the current system
doesn’t work, like the President’s Panel did
in some areas, and you come up with a system that’s
self-policing and self-enforcing.
You would see the benefit and how much the
government is spending on, for example, subsidizing higher-education
costs through the Tax Code. It just makes it more flexible,
because if you want to stop subsidizing higher education,
all you have to do is remove that exclusion. The effect
becomes transparent. In contrast, the Presidential Panel
did not address the philosophy behind the tax system. Their
approach was more tactical than strategic.
States and Blue States
Both the Presidential Panel and the SET proposal
dealt with the alternative minimum tax [AMT]. How did they
deal with it, how did you deal with it?
To make tax reform revenue-neutral, the only
thing that balances the AMT in terms of magnitude is the
state and local tax deduction. The Presidential Panel said,
Take away the AMT, which is worth 28% to affected taxpayers,
but also take away the state and local deduction, which
is worth 35%.
Because the removal of the AMT in the Presidential
Panel’s proposal coincides with the removal of most
of the deductions that would trigger the AMT, figuring out
the exact impact is difficult. But I think it is clear that
the people hurt by the AMT will be hurt by the Presidential
Panel’s system to a similar degree.
I think they attacked the AMT problem head-on.
They figured out that the AMT was basically eliminating
the tax savings from the state and local deductions of wealthy
people in high-tax states. So they said, We’ll eliminate
both the AMT and the state and local tax deduction. People
in New York and California would disproportionately benefit
from eliminating the AMT, but they would disproportionately
suffer from the elimination of the state and local tax deduction.
I think the Panel has essentially taken the AMT and made
it the regular tax! What is underlying is that this is a
choice that Congress made three years ago when they had
a choice to either remove the AMT or lower the tax rate
on dividends and capital gains. Congress chose to lower
the rate on dividends and capital gains. As result, today
it’s said that we can’t afford to do away with
the AMT because of the tax revenue it would cost. When the
Presidential Panel looks at tax reform, that reduction in
the tax rate for capital gains and dividends is left untouched,
and they look at how to recover that revenue in a different
I disagree, I don’t think it had to
do with the AMT. I think the rate reduction on capital gains
and dividends was part of this major drive to reduce the
taxation of invested capital and the double taxation of
dividends. The only item large enough to offset doing away
with the AMT has always been the state and local tax deduction.
But in terms of moving along the capital gains path, what
the Presidential Panel has done is fascinating.
Another interpretation is the fairness in the elimination
of specific deductions. Even the home mortgage interest
deduction, which I don’t think will be entirely eliminated
for economic reasons, is under consideration. Reducing the
home mortgage interest deduction creates a more level playing
field for renters versus homeowners, even though its effect
across states would be controversial.
The implementation issue is also a big one.
I hate phase-ins, but to say you can deduct your mortgage
interest in 2007 but not in 2008—people have made
certain economic decisions based on the existing tax law,
and you can’t just yank the rug out from under them.
There are really two issues to address. By having a deduction
for state and local taxes, states that have chosen to be
conservative in their spending, and therefore have lower
tax rates, are effectively subsidizing states that have
decided that they want more public expenditures, and therefore
have higher tax rates. Why should people who’ve decided
to be austere in their public spending have to subsidize
people who have decided to have the government provide services?
Yes, eliminating the deduction for state and local taxes
would be an abrupt change from a policy that’s been
in place for a long time, but conceptually, it’s not
considering differences in tax rates, you also have to consider
the differences in the cost of living across states. This
is the most productive country in the world because we try
to maximize profits and efficiency by reducing costs, by
doing business in states and places where things are cheaper.
It is difficult to start telling other states that they
should subsidize us because we choose to live in a place
that has a higher cost of living for whatever reason—at
least some of it due to higher tax rates.
That’s counterbalanced by the fact that
states like New York send more tax money to Washington than
we get back.
That is a political decision having to do
with who is politically in office at the time. It may balance
out or not, but conceptually the two are unrelated.
I have to take exception: 42% of the New York State budget
[$44.5 billion of the $106.5 billion 2005/2006 budget] consists
of Medicaid costs, a federally mandated program. So the
federal government in fact has a substantial impact on the
New York State tax system.
But New York State’s rate of Medicaid
spending and service delivery is vastly higher by choice.
The federal government mandates that we have a Medicaid
program, but New York has chosen a system of Medicaid spending,
for better or worse, that is substantially higher than that
in the rest of the country. [According to the New York
Times, New York spends $10,644 per Medicaid recipient,
as compared to $7,626 for the second-highest state, Pennsylvania.]
two largest items in the New York State budget are Medicaid
and public education [$16.2 billion for school aid in the
2005/2006 budget], upon which New York, New Jersey, and
Connecticut have chosen to spend more than other states.
[The top five, according to NEA estimates for 2004/2005,
are: New York, $12,879 per student; Connecticut, $11,893;
Vermont, $11,641; New Jersey, $11,502; and Massachusetts,
$11,322; with a national average of $8,554.]
things, for better or worse, have been viewed as a net positive.
But I don’t want to argue the social policy. Alan
is right, the social policy of New York was a choice, but
other states haven’t chosen to pay for a generous
public service system.
New York and California contain a large concentration
of “liberal” people, in terms of their attitudes
toward the less fortunate in society. We have constantly
had a stronger and more expensive welfare system and have
been willing to fund it, whether that’s ultimately
good for economic development or not.
It’s worth noting, when talking about
all the Panel’s proposals, that everybody will have
pros and cons about different provisions, but the report
is clear that the Panel did a lot of compromising to come
up with a balanced plan. They encouraged readers not to
harp on each piece but to look at the entirety.
When looking at the sum total of all these
various reforms—changing the home mortgage interest
deduction, changing the health insurance exclusion, eliminating
the deduction for state and local taxes—I had an idea:
What if they had made enough changes with specific winners
and losers such that, on average, people came out at approximately
the same place—but imagine they also wrapped a SET
system around it so that the system is more manageable?
seems to me that it might be worth eliminating the state
and local tax deduction in return for a stable federal income
tax system that would not only be simpler but would also
be more efficient. A system that wouldn’t be out of
control in two or three years when more provisions are added.
A system that might close that tax gap from 85% to 90% and
help fund all the expenditures that are necessary to keep
a government going.
a Culture of Compliance
What about compliance?
As we mentioned earlier, under the SET Tax
system, everybody is going to be filing a return. When you
file that return, even if you come to a zero tax at the
bottom, you have made a positive, auditable affirmation
of your income. Which is easier to find in an audit, the
mistakes that are on the piece of paper or the ones that
aren’t? In the SET system, you cut out the mistakes
that aren’t on paper.
How much tax revenue might that recapture?
About $100 billion and growing—I’m guessing
a third of the tax gap, which is expected to hit over $300
billion in the next five to 10 years. We know that we won’t
get all of it, and we’re not going to capture the
entire underground economy either, but the simple act of
enumeration lends itself toward more sophisticated review,
even of the deductions or exclusions claimed by taxpayers
in the fifth quintile. Once you focus on that, you get a
much more administrable system that is more transparent,
for administrators, taxpayers, and tax-return preparers.
It isn’t so much that it’s a lot simpler as
it’s just a lot clearer. Complicated people are still
going to have complicated stuff.
Hecht: I think a point in the SET Tax system bears repeating:
If you have any income, you have to file a tax return.
And it connects the people who earn the money
to the government they elect and fund in a way that they
are not connected today. If we believe in accountability,
this is a win-win, administratively and philosophically.
Part of the compliance problem is ignorance and perceived
complexity. For a lot of low-income taxpayers, those that
can’t afford a paid preparer, tax filing is intimidating.
It’s no different than myself being intimidated by
fixing a car. We may just be creating another opportunity
for noncompliance, not because people don’t want to
pay tax but because of a perceived complexity.
I think you have to create a culture of compliance.
Once people realize that it’s simple and that by complying
they won’t necessarily owe anything, and that they
won’t get in trouble, I don’t think it will
take long for people to figure it out. But as long as you
retain what the Presidential Panel has retained—if
you don’t put the simplicity of the SET system around
it—compliance will continue to be a problem. That’s
why fixing the system itself, not just the elements of the
system, is so important.
Fairness was one goal of the Presidential Panel. Do you
think the changes in its proposals achieve that?
I don’t necessarily think so, given both plans’
provisions for preferential treatment of dividends, capital
gains, and interest income. Why should income earned by
one person be treated differently than income earned by
I agree conceptually, but I think their justification
is the double taxation of corporate dividends.
I’m not troubled by the double taxation of corporate
earnings. If a company makes money and distributes dividends,
it’s income for me. If I’ve got the capital,
and the choice, of course I would invest in companies that
produce dividends and pay less tax than on the income that
I earned from the sweat of my brow. And I find that more
offensive than the double taxation of corporate earnings.
I believe there should be some incentive for capital growth,
but to tax capital gains at only
8 Qf % [under SIT, for taxpayers in the highest bracket]?
Why not give the corporation the deduction for it? That
puts everyone on the same footing. If you have $10,000 of
income and I have $10,000 of income, we should be paying
the same tax.
I have a hypothetical proposal then: Why not
just disallow the deduction for interest expense and put
all corporations on equal footing? Or eliminate the corporate
tax entirely? If you think that the beginning and end of
taxation is personal income, then, yes, people should pay
exactly the same tax on dividend income as earned income
or interest income. But to avoid being taxed twice, this
would mean either disallowing the deduction for interest—so
that debt would be put on the same footing as equity capital
within a business—or it would mean not taxing corporations
I think that much of the GIT proposal, the
expensing of investment other than land and buildings, could
effectively do that. I don’t agree with it, but if
you’re going to tax the individual on the interest
income they earned on debt of the corporation, then you
probably should allow the corporation to deduct interest
Why have capital gains traditionally been taxed at lower
rates than other income?
Let me illustrate by a personal example: My
father bought a house in 1948, and sold it in 2004 for many
times his original purchase price. In truth, he had no gain
at all; the value just kept up with inflation. So, conceptually,
the reason for taxing capital gains at lower rates was that
capital gains are in some ways not gains at all. Now, if
the price of a stock doubles in 12 months, that really is
a capital gain, whereas if the value of a home doubles in
20 years, that owner actually lost money.
reason to tax capital gains at a lower rate is to incentivize
economic growth, to reward individuals for taking on economic
risk. Right or wrong, that is the rationale. I happen to
think that—for those reasons, and because I don’t
like the complexity of an alternative such as indexing—there
should be some adjustment for capital gains. But it could
be worked into the SET Tax simply and in an easy-to-understand
I think that’s exactly what you have under the President’s
proposal. You’ve got a benefit for the sale of corporate
stock; an exclusion, probably justified, for the sale of
a home. For most people, their home is the biggest investment
they make in their whole lives. Politically,
and socially, the government has taken the position that
we ought not to deprive them of the benefit of that appreciation.
What you’ve got under the Presidential Panel’s
proposal is a 75% exclusion of gains from corporate stock.
Yet if I owned a building or real estate, if I had taken
the same economic risk, under the proposal, I would pay
ordinary income tax rates.
I wasn’t trying to defend the proposal, just defend
why, conceptually, capital gains should be treated preferentially.
The tax law has too many deviations from the underlying
rationale. Our biggest failing after the 1986 Tax Reform
Act was that once the principles—equity, fairness,
and simplicity—were laid out and agreed to, we sat
by while tax law after tax law was passed, without a comment
about how every single one of those principles was violated
by every subsequent tax law.
This goes back to the earlier point that the
Panel’s proposal dealt with the adjustment and simplification
of the tax system, but didn’t overhaul it strategically
The kind of complexity we’re talking
about—being fair through inflation adjustments, through
reduced effective tax rates for engaging in risky behavior
like investing in stocks—is easily accommodated in
the SET Tax system. The exclusion would be something that
only a few people would have to calculate; there would be
an exclusion you could look up for trading in common stocks
based on the buy date and sell date, and that would incorporate
the SET Tax could accommodate tinkering and complexity transparently
that would only be used by people whose situations require
it. Because the Presidential Panel worked within the existing
structure, they had to do a very rough justice and create
winners and losers on the fringes.
the SET system, rather than introducing complexity to even
out outcomes, complexity is reserved for specific, unique
circumstances. If Congress wants to provide an economic
benefit for X, those few people who wanted to engage in
X-type investments or transactions can claim that exclusion.
They’d know about it, and know how to calculate it
on the “X subschedule.” It would be easy to
monitor, easy to comply with, and appropriately complex
for people who choose to engage in complexity. It would
represent a tax policy decision, and when that decision
is debated and chosen, it should be something completely
transparent to the reporters and the voters.
How would the Presidential Panel’s proposals affect
I would be interested in everybody’s reactions to
the GIT proposal to expense all new business investment.
What will the effect be? Is this effectively going to eliminate
whatever corporate taxes are still paid?
I don’t know that it will eliminate
all corporate taxes, but it will eliminate the prejudice
toward the intellectual-property industry versus manufacturing.
The manufacturing sector has always been at a disadvantage,
because their productive assets—plant and equipment—had
to be capitalized and written off for up to 39 years, whereas
companies whose productive assets are primarily intellectual
property have generally been able to write off all their
costs through operations or research and development. R&D
has even been subsidized by credits. Microsoft’s balance
sheet is a lot smaller than General Motors’.
is a fundamentally favorable prejudice in the Tax Code for
the intangible-dominated industries. If they allow all new
investment in hard industries to simply be written off,
then you’re putting both kinds of companies in those
different industries on the same footing, and you might
spur manufacturing in the United States. I don’t know
if it’s right or wrong, I’m just espousing the
logic behind expensing.
It also goes to the issue of simplification, aside from
the economics. I don’t know if you’ve been through
a depreciation guide lately, but it’s thicker than
a Master Tax Guide.
But it does violate the concept of equity
and fairness. When you start an enterprise, you incur certain
costs to generate revenue, and your income that is taxed
should be allowed a deduction of “ordinary and necessary”
expenses. If it is necessary, rational, or preferable to
do business by carrying a certain amount of debt with interest
expense, that interest is a legitimate cost of doing business.
I’m uncomfortable with any tax system that doesn’t
include that principle. We’re losing sight of core
principles. I know there have to be exceptions to any principle,
but the question each time should be: If we are moving away
from principle, is it worth it?
Another point worth mentioning, with regard to compliance:
Under the Presidential Panel’s proposal, small businesses
would calculate their taxes from their bank statements.
It’ll be basically a cash receipts and cash disbursements
system. But, to monitor this, the banks will be required
to send bank statements—a summary of transactions,
income, and expense—to the government. That plan sounds
a bit scary.
That sounds like Big Brother. I think what the Panel was
struggling with—what we struggled with, too—was
how to increase that compliance rate to above 85%. Who’s
not complying? It’s unincorporated businesses, and
maybe the Panel asked, How do we identify what’s missing,
how can we get some kind of cash reconciliation from an
Insurance and Social Security
We haven’t really talked about one of the Panel’s
most controversial provisions: the limit on the deductibility
of employer-provided health insurance. When I first saw
this I was horrified, because I didn’t want to see
any taxes on health insurance. But what were your reactions?
I was initially troubled. My first reaction
was, Don’t we want everybody to have affordable health
insurance? But the limit they chose—approximately
$11,500 [for families; $5,000 for individuals], the national
average, and roughly what Congressmen get—sounds pretty
fair to me.
I think the current system can only be considered inequitable.
You can get medical insurance as a tax-free fringe benefit
if you’re employed. But if you’re unemployed,
if your employer doesn’t provide coverage, or if you
purchase coverage yourself, you get no deduction at all.
The principle behind the Panel’s proposal is sound,
and puts everyone on the same footing. They reduced the
deductible amount available to covered employees, and they
increased the amount—from zero to this same amount—for
uncovered individuals. I don’t think the exact level
is really the issue. The concept is excellent.
I think that analysis was excellent. The proposal
comes to a median point where anybody can deduct up to this
amount spent on health insurance, regardless of the source.
If Congress wants to socially adjust that median level,
if it’s too much or too little, it can be changed
And everyone is treated equally.
I agree, but there is something else behind
this. The Panel did this because they believe, in theory,
that if fortunate citizens had to fully pay for their health
insurance beyond a certain level, the actual cost of medical
care might go down because consumers would drive some decisions
about medicalcare. I don’t know if it’s right
or wrong, but I think that’s part of the thinking.
And this thinking also applies to concepts such as health
savings accounts; some economists think that our healthcare
costs are too high because the pressures of capitalism don’t
apply sufficiently to control costs the way they do in other
obvious disadvantage to this proposal, however, accrues
to people in New York and California, where healthcare costs
more than in Florida and Texas.
One could argue that’s because New Yorkers
made the choice to have more doctors—and more lawyers—than
And it can also be argued that, the same way the cost of
health insurance exceeds the cost of steel in a General
Motors automobile, the cost of liability insurance and legal
fees may someday exceed the amount that goes to doctors
when you pay your medical bills.
Another controversial topic: Both the SET Tax and the Presidential
Panel’s proposals shied away from Social Security.
Could either have productively addressed the problem, and
Until you decide whether it’s a welfare
system or a pension system, you can’t address it.
I don’t think the SET system, or the Panel’s
proposal, could address the issue without an answer to that
Once you address the tax policy issue, integrating
Social Security into the regular tax system is straightforward.
For example, under the SET system, you could have an exclusion
equal to the amount of Social Security income everybody
gets, which would convince most of the population that Social
Security is never taxed.
Regarding the taxability of Social Security
benefits: Social Security is fast becoming, and probably
already is, the most highly taxed income that an individual
can have: It is the only source of income where an individual
pays tax directly on the return of capital. The original
concept of taxing Social Security at the maximum rate of
85% was, to my understanding, originally intended because
the average person contributed approximately 15% of the
amount he would actually collect during his retirement years.
As happened with the AMT, that principle went into effect,
and years later it has been forgotten. Now when individuals
will be getting little or no return on their investment,
they will be paying tax on the privilege of getting back
their own money.
the future of Social Security: What we need to focus on,
and, as CPAs, what we should be explaining to the public,
is that what we have now is a two-part system. First, we
are paying a tax to the extent that we are funding retirement
benefits for retirees who did not fully pay for their own
we are paying into a system for our own retirement. But
should this part be a tax, entitling us to some politically
determined retirement benefit? Or should it be a personally
owned retirement fund? I think that conceptual question
is essential for people to understand, so that we as a country
can make a rational decision.
The Social Security system is actually two things: It is
a tax that the wealthy people voted for because they were
told it was a pension and savings account, and the poor
people voted for because they were told it was a welfare
I think the Social Security issue will fall
from the current agenda, because I think the idea was to
privatize the system. It was somewhat analogous to the transition
away from defined-benefit retirement plans to defined-contribution
retirement plans. When that idea didn’t gain traction,
I think President Bush gave up on Social Security reform.
As in most policy debates, we seem to have
come all the way around to politics. Thank you all for this
discussion, and, indeed, for your work over the last several
Committee on Practical Reform of the Tax System represents
the first step in the NYSSCPA’s taking an active role
in the public debate over tax policy. One panel participant,
Richard Hecht, chairs the new Tax Division Oversight Committee’s
Tax Policy Subcommittee, charged with fostering and facilitating
the development of tax-policy position papers for review
by the Society board and dissemination to the public, the
media, and government.
Report of the President’s Advisory Panel on Tax Reform,
and its SIT and GIT plans, represent a milestone in the
discussion of major tax reform in Washington, but no one
knows what form major tax reform legislation will ultimately
take, whether it is enacted by this President and Congress
or in the future. What is clear is that the debate will
continue, and there is an opportunity for knowledgeable
parties to educate the public and its elected representatives.
Society leadership hopes to establish the profession’s
credibility in matters of tax policy, and looks to the membership
for their expertise in strengthening this ongoing role.
Members that have something to say should be active in their
committees and look to the Tax Policy Subcommittee for support
in shaping an active role for the profession in public debate.
Note: The opinions expressed by the panelists above
are their own and do not necessarily represent those of
their employers or the NYSSCPA.
CPA Journal welcomes comments and feedback from readers
regarding the issues discussed above; letters may be sent
to the editors at CPAJ-Editors@nysscpa.org.