Comments to the President's Advisory Panel on Tax Reform
The Iowa Center for Fiscal Equity is pleased to provide comments to the President’s Advisory Panel on Federal Tax Reform. I will address each of the Panel’s questions in turn.
1. Headaches that taxpayers - both individuals and businesses - face because of the existing system. By headaches, we mean unnecessary complexity and burdens.
For the average citizen, the entire act of filing income taxes, from collecting W-2 forms to obtaining the forms to filing the return are an unnecessary burden. For most income tax payers, this effort duplicates the efforts put forth by their employers or investments, who must generate the required W-2 and 1099 forms. Small investors are doubly burdened by having to track the purchase and sales price for their investments.
Small sole proprietors are burdened by the same level of record keeping as required by larger business owners. Many small business operators do not have the knowledge of accounting required to meet these requirements, necessitating the employment of tax professionals, which adds an economic burden.
The calculation of the Alternative Minimum Tax is a definite burden, as it requires a complete recalculation of the tax. The reach of this tax has increased in recent years and is projected to reach lower in years to come.
2. Aspects of the tax system that you believe are unfair.
The payment of payroll taxes is regarded as unfair by low-income earners. While this coverage is valuable to these earners, their direct withholding is demoralizing to them. Additionally, direct payment of these taxes, rather than payment by the employer, results in lower benefits than would otherwise be the case than if these taxes were collected as a percentage of total net revenue at the employer level and credited to the employee on an average income basis. Additionally, collecting these taxes directly exempts investment income in a way that is clearly unfair to wage earners, while collecting them at the enterprise level captures all such income.
Corporate tax benefits for specific industries are manifestly unfair to the remainder of taxpayers, both businesses and individuals, who must shoulder the remaining burden.
Provisions taxing estates rather than individual heirs are manifestly unfair to those without inherited property. Tax shelters that shield large fortunes from taxation are also unfair to those who must labor or directly invest and pay taxes.
The subject of unfairness is also important to consider in the realm of tax reform. A total abandonment of a personal income tax would be manifestly unfair to lower income tax payers, since it would either end progressivity by leaving all income taxed at the same rate.
3. Specific examples of how the tax code distorts important business or personal decisions.
The home mortgage interest deduction distorts the rent versus buy decision. Additionally, this deduction raises interest rates due to a subsidy effect, as a higher interest rate is more palatable because it is subsidized. This may or may not allow rental housing providers to charge higher rents, depending upon how savvy potential renters are to this benefit (savvy renters will demand a lower rent because they are not eligible for the deduction). On the other hand, home ownership is a societal value as part of the American dream. This difficulty can be overcome if housing expense, whether interest or employer provided housing, is provided a tax benefit at the enterprise level.
The tax code distorts the decision to have children, although this is more in its failure than its application. In prior decades the exemption for children made an economic difference, allowing for larger families. Even with the introduction of the Child Tax Credit, the effect of the failure of this credit to grow with the cost of having a child (including day care and housing) has resulted in what is now termed the aging crisis.
The tax and ERISA system encourages the use of contract and temporary employees rather than adding staff. This has lead to a decline in careers with one firm where the more natural inclination is to hire staff directly.
The current tax code allows firms to avoid taxes by moving their headquarters offshore, while maintaining operations in the United States. While some would argue it is the complexity, or even the existence, of the corporate income tax that does this a counter-argument can be made that the problem is the set of rules for foreign corporations is to blame. I have no qualms about firms having a legal existence in the Cayman Islands as long as this does not shield their operations from taxation or liability under U.S. law. Dealing with this issue will also result in an end to the practice of locating corporations in tax friendly states to avoid taxation, which is a result of provisions linking tax policy to the location of the headquarters rather than the location of operations.
Finally, specific tax benefits for various industries impact individual economic activity by forcing individuals to pay a higher rate to compensate for these benefits, thus depressing overall economic well being at the expense of the well connected. The current tax code, which under collects revenue at the higher end, has resulted in record setting deficits. These could potentially cripple the spending side of the economy in the event that foreign banks divest themselves of these debt instruments. In the current economy, where much of this debt is held by Asian banks, the result is the crippling of the production sector as merchants seek cheaper goods from these economies, leading to a loss of American jobs. This distortion would not occur if the budget were balanced.
4. Goals that the Panel should try to achieve as we evaluate the existing tax system and recommend options for reform. At this point, we are not looking for specific proposals.
The Iowa Center for Fiscal Equity urges the Panel to consider the following goals:
1. Individual taxpayers (regardless of marital status) making under $150,000 per year (net) should no longer be required to file income taxes. There should be no family aggregation to achieve this figure (in other words, a spouse making under this amount would not file, even if the other spouse must file).
2. Tax benefits encouraging childbirth must be maintained and indeed increased. This would decrease the incentives to abortion and end the aging crisis that will destabilize the Social Security system.
3. Non-retirement FICA taxes must be incorporated into the new structure.
4. Other tax benefits encouraging home ownership, charitable giving, education and home ownership must be maintained, even if channeled through an employers tax obligation.
5. The tax system should not be used as an incentive to fire employees and reemploy them as private vendors. Individual consultants who spend over 90% of their effort on one client should be considered employees for tax purposes.
6. Both wages and productivity from capital must be taxed.
7. Any consumption or value added tax must fund the operations of government with the exception of overseas military deployments and debt service and retirement that are better funded by an income tax on higher income earners and heirs; and tariffs and excises which can be used to fund border security, diplomatic, and other operations connected to the excise collected. In general, revenue neutrality must be abandoned in favor of revenue sufficiency.
8. Inherited assets must not be taxed until liquidated.
9. Tax benefits for the sale of assets to an ESOP or Employee Cooperative must be maintained.
10. Economic operations must be taxed where they occur, regardless of the ownership status of the concern.
11. Aside from specific benefits listed in item three, industry specific tax benefits must be ended. 12. Some form of progressive income taxation must be maintained, at least until the public debt (held by both the public and the Social Security system) is retired and foreign military missions are accomplished.
13. Small home based firms and franchisees with limited revenue must not be required to pay or file taxes. In other words, no more taxing Avon ladies.
14. Tax collection should remain as pain free as possible. We do not believe that a transparent tax is necessarily the best tax, as the goal of transparency contains a bias against public action for the general welfare.
1. Headaches that taxpayers - both individuals and businesses - face because of the existing system. By headaches, we mean unnecessary complexity and burdens.
For the average citizen, the entire act of filing income taxes, from collecting W-2 forms to obtaining the forms to filing the return are an unnecessary burden. For most income tax payers, this effort duplicates the efforts put forth by their employers or investments, who must generate the required W-2 and 1099 forms. Small investors are doubly burdened by having to track the purchase and sales price for their investments.
Small sole proprietors are burdened by the same level of record keeping as required by larger business owners. Many small business operators do not have the knowledge of accounting required to meet these requirements, necessitating the employment of tax professionals, which adds an economic burden.
The calculation of the Alternative Minimum Tax is a definite burden, as it requires a complete recalculation of the tax. The reach of this tax has increased in recent years and is projected to reach lower in years to come.
2. Aspects of the tax system that you believe are unfair.
The payment of payroll taxes is regarded as unfair by low-income earners. While this coverage is valuable to these earners, their direct withholding is demoralizing to them. Additionally, direct payment of these taxes, rather than payment by the employer, results in lower benefits than would otherwise be the case than if these taxes were collected as a percentage of total net revenue at the employer level and credited to the employee on an average income basis. Additionally, collecting these taxes directly exempts investment income in a way that is clearly unfair to wage earners, while collecting them at the enterprise level captures all such income.
Corporate tax benefits for specific industries are manifestly unfair to the remainder of taxpayers, both businesses and individuals, who must shoulder the remaining burden.
Provisions taxing estates rather than individual heirs are manifestly unfair to those without inherited property. Tax shelters that shield large fortunes from taxation are also unfair to those who must labor or directly invest and pay taxes.
The subject of unfairness is also important to consider in the realm of tax reform. A total abandonment of a personal income tax would be manifestly unfair to lower income tax payers, since it would either end progressivity by leaving all income taxed at the same rate.
3. Specific examples of how the tax code distorts important business or personal decisions.
The home mortgage interest deduction distorts the rent versus buy decision. Additionally, this deduction raises interest rates due to a subsidy effect, as a higher interest rate is more palatable because it is subsidized. This may or may not allow rental housing providers to charge higher rents, depending upon how savvy potential renters are to this benefit (savvy renters will demand a lower rent because they are not eligible for the deduction). On the other hand, home ownership is a societal value as part of the American dream. This difficulty can be overcome if housing expense, whether interest or employer provided housing, is provided a tax benefit at the enterprise level.
The tax code distorts the decision to have children, although this is more in its failure than its application. In prior decades the exemption for children made an economic difference, allowing for larger families. Even with the introduction of the Child Tax Credit, the effect of the failure of this credit to grow with the cost of having a child (including day care and housing) has resulted in what is now termed the aging crisis.
The tax and ERISA system encourages the use of contract and temporary employees rather than adding staff. This has lead to a decline in careers with one firm where the more natural inclination is to hire staff directly.
The current tax code allows firms to avoid taxes by moving their headquarters offshore, while maintaining operations in the United States. While some would argue it is the complexity, or even the existence, of the corporate income tax that does this a counter-argument can be made that the problem is the set of rules for foreign corporations is to blame. I have no qualms about firms having a legal existence in the Cayman Islands as long as this does not shield their operations from taxation or liability under U.S. law. Dealing with this issue will also result in an end to the practice of locating corporations in tax friendly states to avoid taxation, which is a result of provisions linking tax policy to the location of the headquarters rather than the location of operations.
Finally, specific tax benefits for various industries impact individual economic activity by forcing individuals to pay a higher rate to compensate for these benefits, thus depressing overall economic well being at the expense of the well connected. The current tax code, which under collects revenue at the higher end, has resulted in record setting deficits. These could potentially cripple the spending side of the economy in the event that foreign banks divest themselves of these debt instruments. In the current economy, where much of this debt is held by Asian banks, the result is the crippling of the production sector as merchants seek cheaper goods from these economies, leading to a loss of American jobs. This distortion would not occur if the budget were balanced.
4. Goals that the Panel should try to achieve as we evaluate the existing tax system and recommend options for reform. At this point, we are not looking for specific proposals.
The Iowa Center for Fiscal Equity urges the Panel to consider the following goals:
1. Individual taxpayers (regardless of marital status) making under $150,000 per year (net) should no longer be required to file income taxes. There should be no family aggregation to achieve this figure (in other words, a spouse making under this amount would not file, even if the other spouse must file).
2. Tax benefits encouraging childbirth must be maintained and indeed increased. This would decrease the incentives to abortion and end the aging crisis that will destabilize the Social Security system.
3. Non-retirement FICA taxes must be incorporated into the new structure.
4. Other tax benefits encouraging home ownership, charitable giving, education and home ownership must be maintained, even if channeled through an employers tax obligation.
5. The tax system should not be used as an incentive to fire employees and reemploy them as private vendors. Individual consultants who spend over 90% of their effort on one client should be considered employees for tax purposes.
6. Both wages and productivity from capital must be taxed.
7. Any consumption or value added tax must fund the operations of government with the exception of overseas military deployments and debt service and retirement that are better funded by an income tax on higher income earners and heirs; and tariffs and excises which can be used to fund border security, diplomatic, and other operations connected to the excise collected. In general, revenue neutrality must be abandoned in favor of revenue sufficiency.
8. Inherited assets must not be taxed until liquidated.
9. Tax benefits for the sale of assets to an ESOP or Employee Cooperative must be maintained.
10. Economic operations must be taxed where they occur, regardless of the ownership status of the concern.
11. Aside from specific benefits listed in item three, industry specific tax benefits must be ended. 12. Some form of progressive income taxation must be maintained, at least until the public debt (held by both the public and the Social Security system) is retired and foreign military missions are accomplished.
13. Small home based firms and franchisees with limited revenue must not be required to pay or file taxes. In other words, no more taxing Avon ladies.
14. Tax collection should remain as pain free as possible. We do not believe that a transparent tax is necessarily the best tax, as the goal of transparency contains a bias against public action for the general welfare.
posted by Michael Bindner at 3:38 PM
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