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President’s Economic Advisory Board Report on Tax Reform

Submitted by admin on Thu, 9/16/2010 - 12:00 am

The President’s Economic Advisory Board released its report on Tax Reform last month, and it’s a big read at 130 pages, but the overall summation seems a bit contradictory to what the President is saying, or maybe what he is leaving out. The overall goal of the Advisory Board related to tax reform options was to achieve the following: simplification of the tax system, improving compliance with existing tax laws, and reforming the corporate tax system.

The Board was asked to explore options to achieve these goals, BUT they were asked to exclude options that would raise taxes for families with incomes less than $250K a year. Reread the last sentence. Now, in the same paragraph, the Board goes on to say this in regards to individuals earning less than $250K per year:

“We realize that revenue neutrality by income class might result in increases or decreases in tax liability for subgroups or individual taxpayers within each income class – that is, revenue neutrality might result in “winners” and “losers.” We hope that the Administration and the Congress will select changes that are desirable on their merits and not worry about the distributional effects of each of them individually.”

Essentially, there is no way to NOT raise taxes for some groups of people making less than $250K, which to me is most of America, but there may be a neutral effect as a result, i.e. there will be an increase for some (individuals making $60K+) and a decrease for some (individuals making $30K or less), and possibly there will be a range with no change, such as individuals earning between $30K and $60K. Keep in mind, this is only an example of my interpretation of the report so that you understand what is being suggested. Here is an additional quote from the report on the subject:

“Of course, even if the rates are adjusted to be revenue neutral in each income class, there will be individual taxpayers who gain and lose. We did not try to hold all taxpayers harmless in the options we evaluated, and we were not asked to do so by the President. It would be impossible to do so without substantial costs in terms of lost revenues.”

There are a variety of simplification methods suggested, most of which will combine or consolidate credits, the disadvantage to some of these would result in different groups facing more of a tax burden.

The compliance options proposed are of more significance to us, as the so-called “friendlier” IRS will be coming hard, friendly or not. The “tax gap”, or amount of money owed by delinquent taxpayers in 2001, was estimated to be at $345 Billion (there are no other recent figures to date). Voluntary late payments and collection enforcement brought in approximately $55 Billion, leaving a net gap of $290 Billion still owed.

The Board states that, “The IRS has limited resources or ability to assess or collect” these funds, “the IRS will need to devote new resources targeted in these areas”, and “enforcement through audits is often the only way to uncover underreporting of income.” There is also a proposal that would allow the IRS to open multiple years in an audit, even extending beyond the current 3 year statute of limitations, if a non-compliance total liability of greater than 20% was found. Obviously the disadvantage here would be to the taxpayer, creating an additional burden and necessity to keep records longer than normal.

With all of this said, the Board has also suggested that a simpler tax system for individuals would increase compliance of filing, effectively reducing the tax gap in the future. Chances are this suggestion will be overlooked.

I obviously have only skimmed the surface of the 130 page report here, but there could be a lot to look forward to in the near future.

You can visit the Advisory Board’s website here.