Tax Policy Committee Deliberates Reform

Tax Policy Committee Deliberates Reform
Experts Ponder Alternatives to Current Tax System

By Simon Eskow

Continued from the Home Page

The guidelines will be based on the first meeting of the Society’s Committee on Practical Reform for the Tax System, in which expert practitioners, economists and academics held a fruitful discussion of a system enmeshed in social, economic and political complexity.

The group found common ground for a general framework with which to form its guidelines, drawing on principles of taxation from Adam Smith’s The Wealth of Nations, among other sources.

“Our committee will try to digest (the experts’) comments,” Committee Chair David A. Lifson said in closing the Jan. 7 meeting. “We’ll take (the discussion) as a tutorial and try to come up with a tax policy guideline, asking…Is the wheel broken or just deflated? Do we need a new wheel or a patch?”

The committee also hopes to make practical suggestions for improved or new systems that tax policy makers can use in designing tax regimes.

The Bush administration priority to simplify the tax code during the president’s second term prompted the formation of the committee as a means of harnessing the Society’s taxation expertise, anticipating proposals to come out of a presidential panel. Bush completed assembling the bipartisan tax simplification panel on Jan. 7, and asked that it report its conclusions to the White House by this summer.

While the NYSSCPA committee fell short of drawing immediate conclusions of its own, lively discussion among the assembled experts laid the groundwork for future guidelines, adopting principles such as fairness and transparency as a test for any plan to simplify the code.

Participants said that past efforts to simplify the tax codes, such as the Tax Reform Act of 1986, became “cluttered” over time with social and economic policies driven by special-interest groups and pushed by lawmakers eager to please their constituencies. Exemptions, deductions and badly written law have contributed to the complexity of the tax code, and to some experts, this has created a system that does not follow the fairness principle.

Progressive income tax rates, credits and exemptions mean many eligible filers have no tax liability at all. Scott Hodge, president of the Tax Foundation in Washington, said this applies to 48 million Americans, which shifts the burden of taxation onto the shoulders of a narrowing minority who live in high-income states with high costs of living.

“Now we have a shrinking pool of earners, mostly in the blue states, paying a higher share of the revenue,” Hodge said, referring to the states that generally vote Democrat and have higher income, but higher cost of living. “A flat tax would mitigate some of the damage.”

Participants looked at the Alternative Minimum Tax, agreeing that this is in a sense a flat tax that is in need of reform.

“The problem is the structure of AMT,” Alan Dlugash, chairman of the Taxation of Individuals Committee, said. “It has merit to be the framework to improve taxes, but it’s not good as it is now. It’s inequitable. But its concept is not.”

Michael Graetz, a Yale University law professor and former Deputy Assistant Secretary of the Treasury, agreed that the AMT could be made to work with a few adjustments to its “clutter,” allowing some income-connected and local-tax deductions, and indexing the minimum.

Graetz also focused on implementing a Value Added Tax—shifting taxation away from income tax to consumption tax. This is part of a plan he has developed for overhauling the system, which includes an income tax for individuals earning $100,000 or more; a consumption tax for lower- and middle-income earners; and a payroll tax for the lowest wage earners.

Participants discussed other ways to improve the system, including increased funding for the IRS to increase compliance; making “book income” more in line with “tax income” for corporate income tax purposes; limiting taxation to items like wages, payroll, dividends and interest; and applying a 25 percent wealth-transfer income tax to recipients of estates and gifts, with some protections for small businesses and farms.

While they didn’t come to a consensus on any of these suggestions, many did agree with Lifson’s statement that “specific elements of the current income tax system are out of balance and need to be rewritten.”