How you can resist funding the government → about the IRS and U.S. tax law/policy → how is tax law/policy/administration changing? → “tax reform” → Dubya’s tax reform panel

Tax policy junkies will like these links, which I’ve pulled from the ever-helpful TaxProf Blog:

• Direct from the U.S. Government Accountability Office comes the report 21^st Century Challenges: Reexamining the Base of the Federal Government in which you can learn fun facts like this: “American taxpayers paid about $1.9 trillion in combined federal taxes, including income, payroll, and excise taxes, in fiscal year 2004. These taxes, along with over $4 trillion in deficit borrowing, funded the federal government.”
• IRS statistics about the 2003 class of tax returns have been released and one helpful person took the data and released it as a spreadsheet for those of us who like to muck around with numbers.
• The Tax Foundation has put out its latest edition of Facts and Figures on Government Finance and has put a handful of sample chapters on-line.
• So you’ve heard that Dubya wants to reform the tax code? Find out all you want to know about the President’s Advisory Panel on Federal Tax Reform.
• And when it comes time to debating the recommendations of this panel, you’ll want to remember where you bookmarked the Budget Options report from the Congressional Budget Office. It looks at some of the repercussions of 53 different possible tax reforms.
• The U.S. Treasury Department released their explanation of where the money is coming from for the latest budget: General Explanations of the Administration’s Fiscal Year 2006 Revenue Proposals. Within that budget is ten and a half billion dollars for the IRS — which they in turn explain in their report, The Budget in Brief FY 2006.

A while back, Dubya appointed a panel to recommend an overhaul of the tax code. They’re due to make their report at the beginning of next month, but they’ve just floated a trial-balloon that gives us an idea of what they have in mind.

There’s really not much There there. If you were expecting a big push for a flat tax or a national sales tax or for the abolition of the IRS, you’re going to be very disappointed. If you grit your teeth in frustrated envy over those Lucky Duckies at the bottom of the income scale who get away with not paying any income tax, you’re also out-of-luck.

It looks like the panel is going to recommend scrapping the Alternative Minimum Tax, and they’re going to try to make up for the money the government will miss this way by restricting the home mortgage and employer benefits deductions.

On the one hand — what a letdown! I was expecting something much more flashy. Considering how much energy they put into this I’m surprised they came up with such a bland plan. On the other hand — whew! None of these proposals will change how I stay under the tax line.

More details of the recommendations of the President’s Advisory Panel on Federal Tax Reform have come to light. These are more extensive than those proposals that I mentioned last Wednesday.

I don’t want to spend a whole lot of time on this. It’s just a proposal — it’s a long way from being enacted into law, and it may sink into oblivion like Dubya’s mad Social Security party. Even if it does get through the Congressional tract, it will probably be hard to recognize when it comes out the other end. But still, it makes sense to keep an eye out for what might be coming and to try and anticipate how conscientious tax resisters may choose to react.

Some elements of the new recommendations are:

• Something akin to the “X Tax” preserving a progressive income tax, but eliminating taxes on dividends and reducing capital gains taxes as a way of simulating a consumption tax within an income tax framework
• A smaller number of tax brackets, with 75% of people in the lowest, 15% bracket
• Accelerated depreciation on business equipment
• New tax-free savings accounts for retirement, health, education, and home buying will replace the existing tax-free and tax-deferred accounts such as Health Savings Accounts, Individual Retirement Accounts and so forth — this could allow a taxpayer to shield up to $20,000 from taxes each year. “Low income taxpayers could get a savers credit worth up to $500,” which is the cornerstone to my current tax avoision technique.
• Abolishing the Alternative Minimum Tax
• Flattened and simplified business taxes
• Something called the “new work credit” that replaces the Earned Income Tax Credit
• Eliminating some deductions, such as the itemized deduction for state and local taxes paid
• “Myriad personal and family tax breaks would be replaced with one family credit. Income tests designed to keep most current tax breaks within the middle class would be eliminated, letting wealthier individuals and families benefit.”
• Restrictions and reductions of the mortgage interest deduction
• Caps on the deduction for health insurance that employers provide to workers, and elimination of the deduction for other employer-provided benefits like child care and life insurance
• Abolish taxes on social security benefits

Depending on how these are implemented, or indeed if they are, this could be a boon or a challenge to conscientious tax resisters.

Daniel Shaviro at Start Making Sense comments on the proposals from the President’s Advisory Panel on Federal Tax Reform. He says, for instance, that these proposals are not a variety of “X tax” (contrary to what I’d suggested yesterday).

One thing that jumped out at me: “Charitable deductions [would be] allowed to all (rather than just itemizers), but only to the extent [that they are] in excess of 1% of income.” This could be helpful. As it stands today, it is very difficult to use charitable deductions to eliminate your federal income tax.

But don’t get your hopes up. Shaviro doesn’t think the Panel’s plan is going anywhere:

I suspect that this plan is dead on arrival. The Commission was unable to come up with a politically feasible plan. I don’t blame them for this, as I don’t think I could have done any better given the constraints under which they had to work. The killer, politically (although it would have had little hope anyway) was having to impose visible base-broadening in exchange for tax reductions that were much less visible than rate reductions because they involved the AMT.

The result could be another bad setback for the tax reform cause, killing the issue until the next time around.

For the Bush Administration, this is certainly not the magic bullet to restore those sinking poll ratings. I would not be surprised if they were to bury this plan under the heaviest rock they can find.

Shaviro also voices a suspicion that I’ve had about “tax free” savings vehicles like those included in the Panel’s proposals, or like the Roth IRA:

I wouldn’t bet a nickel on the government’s claim (if this plan were to be enacted) that the withdrawals will actually be tax-free. Fast forward ahead to 2020, if you will, when someone who is financially well-off is withdrawing funds from her huge tax-free savings account. Add in the detail that the government might be in desperate fiscal trouble, scrambling to renege on as little as possible of its near-term Social Security and Medicare commitments. What are the odds that the withdrawal will really be tax-free, no matter what Congress said in 2006 or so?

Yet more about the proposals from the President’s Advisory Panel on Federal Tax Reform:

• James Edward Maule reports that the proposals would allow everybody to deduct the cost of health insurance premiums.
• Maule also says that the low-income savings credit (something akin to the Retirement Savings Tax Credit that I use) would be refundable — like the Earned Income Tax Credit is today.
• You can see the panel’s own PowerPoint slides that they used when announcing their proposal by visiting their site.
• The Tax Policy Center has established a web site dedicated to news and information about the panel and its proposals.

You can finally read the actual report from the President’s Advisory Panel on Federal Tax Reform if you’re curious. From what I’ve read about it, there aren’t any big surprises. For those of us using The DON Method, the devil is in the details, and we won’t know these until the legislation (if any) hits committee.

The Tax Foundation has their own analysis of the panel’s report which might help you make sense of it. Be aware, though, that the Tax Foundation has a strong anti-Lucky Ducky bias and are strongly in favor of “flattening” the income tax — that is, tax everybody’s income at the same rate (that is, tax the poor more and the rich less) and change the subject if anyone mentions FICA.

Sounds like major tax reform isn’t going to be an administration priority this year despite the efforts of the President’s Advisory Panel last year. No big surprise.