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Putting Taxes into Focus

Evaluating Candidates' Proposals with the SET Tax

Louis Grumet

Although there are substantial differences between Senators Barack Obama and John McCain in this election year, both presidential candidates agree that tax reform is of paramount importance.

No matter who wins the election, this country will most likely see dramatic tax reform, which should have the attention of all CPAs. But how effective can any solution be within the current convoluted tax code? Does it make sense to put more patches on a system that is so cumbersome that it takes most individuals more than a day to complete a basic tax return?

Under Senator McCain's proposal, the personal exemption for each dependent would be raised from $3,500 to $7,000. There would be a new optional individual refundable healthcare tax credit of $2,500 for individuals and $5,000 for families. While these sound like generous benefits, the actual savings for each taxpayer would be different and difficult to ascertain.

Under Senator Obama's proposal, a new $500 tax credit would offset payroll taxes on the first $8,100 of income. This credit would help individuals and families cope with taxes that are arguably the most regressive in the existing code.

If the Simple Exact Transparent (SET) Tax developed by the NYSSCPA were implemented, Americans would find almost all of the needless complexity gone from tax forms, making it easier for taxpayers to determine the actual impact of proposed tax policies. Under the plan, as presidential polices evolved and won the endorsement of Congress, the effect of the change on each individual would be transparent. Connecting the taxpayer with the process would decrease the chasm between paying and understanding where the money is going and why. Transparency would also give political leaders a much better grasp of how a tax change would affect their constituents.

The SET plan would improve taxpayers' insight as to what taxes they owe, why they owe tax, and how deductions directly benefit them. If the new president wanted to fund a war, help with the subprime mortgage crisis, or bail out the banking industry—and legislators agreed with the policy initiatives—the money American taxpayers contributed to these efforts would be transparent. Filing status determinations, dependents, and exemptions would be replaced with “subtractions” from one's taxable income. Everyone would know how much the subtraction meant in savings: It would be the tax rate times the subtraction.

Under the SET Tax system, we depart from the archaic concepts of exemptions, deductions, and credits, and take a more direct approach to determining taxable income and tax liabilities. Credits like the ones proposed under Senator Obama's tax plan could be built into a simplified Earned Income Credit, rather than structured as a “rebate” of payroll taxes. The tax system does not need an additional credit for the working poor to learn and apply for; the system needs a single, comprehensive approach to implementing tax policy.

Each candidate has proposals to combat the Alternative Minimum Tax (AMT). Although originally intended to prevent wealthy individuals from paying little to no income taxes, the AMT is affecting more middle-income families every year because it was never indexed for inflation. With the AMT, two tax calculations must be made (yielding great complexity), and the higher of the two taxes must be paid. Under the SET Tax, the AMT would be unnecessary, since reducing subtractions can deliver the same disallowance of the tax savings from state and local tax deductions, investor expenses, and other items targeted by today's AMT.

Both candidates state that simplification of the tax code is a necessity. Senator McCain's plan to do so includes creating an optional alternative tax with two rates and larger standard deductions and personal exemptions. Senator Obama's plan calls for simpler returns with the option of pre-filled tax forms to verify and sign. Neither of these proposals makes it simpler for a taxpayer to accept personal responsibility for paying the lowest, legal tax, which responsibility has been the guiding light of the income tax system since inception.

The tax proposals of the two presidential candidates have much in common when it comes to retaining complexity and lacking clarity. It is fair to say that a desire for tax reform arises nearly every 20 years in American politics. Too often, the result is more of the same, tinkering with the particulars but not offering true, comprehensive reform. That is one reason why discussion of tax rates and certain policies was not part of the SET Tax proposal. What was developed instead was a roadmap for easy-to-learn, easy-to-plan-for, and easy-to-use ways of meeting the goals of the tax system in a fair manner.

Our own SET Tax would offer a greatly simplified approach to reform that not only eliminates the AMT but other unnecessary complexities of the current tax system. The calculation of taxes would be simpler—a one-page tax form for most people, and a system that would provide policy makers with a significantly more accurate picture of what and whom to tax.

The SET Tax would allow for an easier examination of the presidential candidates' tax policies and would bring transparency to the tax code. I ask all NYSSCPA members to share thoughts on the tax policies of each candidate and what the preferred direction is for the profession and the country. We are on the edge of change, but which path should we take: simplicity or complexity?

Louis Grumet. Publisher. The CPA Journal, Executive Director, NYSSCPA, lgrumet@nysscpa.org.

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