Society Releases Tax Reform Paper

Society Releases Tax Reform Paper
The Simple Exact Transparent Tax Makes Its Debut

By Simon Eskow

Continued from the Home Page

The Committee on Practical Reform for the Tax System debuted its Simple Exact Transparent (SET) tax, which focuses exclusively on the federal income tax, to the Society’s Board of Directors at their meeting on April 21.

SET offers to maintain most of the existing tax code—though eliminating filing status and reducing nearly all credits and deductions to a set of clearly defined “exclusions”—and establishes a method to make it obvious to taxpayers exactly what is being taxed.

“We found out that a new tax has to be simple, but the problem wasn’t about simplicity; simplicity was the solution,” David A. Lifson, the committee’s chairman, told the board. “The problem is with transparency. The system is no longer a system that people can understand.”

The Society formed the task force before President George Bush’s January State of the Union address, in which he made tax simplification a priority of his second term. Bush then assembled his Advisory Panel on Federal Tax Reform. The Society submitted its SET tax proposal to the panel in late April.

The task force began its work in early January by holding a forum discussion with guest economists and academics to find a fundamental approach to tax reform. The committee used this discussion to develop the SET tax over the next few months during several meetings and telephone conferences.

Ready, SET, Go

The SET tax would tax all incomes over an “acceptable threshold established by our political leaders, reduced by government-approved exclusions at an economically appropriate and socially acceptable single rate,” the paper states.

Income would be defined broadly and exclusions clearly established, using our current, highly developed rules and tax vocabulary, the paper states.

“This concept is a flat tax, but it’s not the flat tax,” Lifson told the board. “It starts with the world and narrows down to your tax rate. Everyone reports income—every single bit of it—but in a simple way.”

The paper recommends a high percent tax rate, but the committee emphasized that Congress could set the rate to any level it found appropriate to accomplish its policy initiatives. That single tax would apply to all income—or gross income—and, though this seems like a flat tax, it would still allow Congress flexibility and progressivity by allowing for a single personal exemption and the ability to add on other exclusions.

These exclusions would encompass most existing deductions, credits and other means to reduce taxable income. The SET tax would recommend $30,000 personal exemption, but that could go to as low as the poverty level or to as high as the Social Security income ceiling.

The basic exclusion would make the tax easy to understand. Wealthier individuals or businesses with more complex forms of income would need to do a little more work to include more exclusions. The paper gives examples of exclusions for capital and corporate income.

The SET tax would eliminate the need for the Alternative Minimum Tax, phase-outs, credits, multiple filing status, and other elements that make the current system “opaque.”

The board lauded the committee for its work, and the Society submitted the paper to the president’s advisory board before their deadline for public comment on April 29. Bush, in a recent press conference, said he expected to hear the board’s recommendations sometime this fall.