Thursday, March 17, 2011

Taxing ourselves to death, and into the hereafter

Why does the US need H&R Block? Why do so many people and companies need an army of tax accountants and tax attorneys? For those who hold these jobs, there may be some bad news ahead. If we had it in us to simplify the tax code -- mainly by eliminating all the special credits, deductions and favors granted by the government to groups that enjoy momentary goodwill of legislators, a lot of the people working in the tax field would need to find a new line of work.

If we went all the way and set the corporate tax rate at ZERO percent, then accounting gimmicks like "depreciation" would lose all meaning. In other wrods, all money left over after the bills are paid would be Profits, available to the owners, where it would be taxed as ordinary income.

There is no doubt a simplified tax system would keep the same, if not more revenue flowing into the Treasury. at the same time it would make taxation fairer by ending the possibility of exploiting convoluted legislation to lower one's bill.

The easiest place to start is with the mortgage interest deduction. Who needs it? This outdated gambit inflates housing prices while offering no true advantage to homeowners. Moreover, most leading nations in the world do NOT permit the mortgage interest deduction. The absence of this tax favor has not harmed the housing industries of those nations.


Tax Plan Aims for 25% Cap

Republican Ways and Means Chief Also Would End or Trim Popular Deductions


The chairman of the House Ways and Means Committee wants to cut the top U.S. tax rate to 25% for individuals and corporations, and cut or eliminate many popular deductions.

The odds of quick action appear slender. But the move, from Rep. Dave Camp (R., Mich.), is significant as a marker in what will likely be a multiyear debate over revamping the tax code. The plan also provides Republicans with a position to pitch in the 2012 election, a campaign that promises to focus heavily on the economy and jobs.

"America needs a tax code that promotes, not prevents, job creation," he said. "Today's code is simply too complex, too costly and too burdensome for families and employers of all sizes to comply with.…We need to set ambitious goals and work toward those, because if we don't try that will be the biggest failure of all."

Mr. Camp's tax overhaul isn't designed to specifically cut the U.S. budget deficit. Overall tax revenues would remain at recent average levels, or about 18% to 19% of gross domestic product, committee aides said.

Some lawmakers want to raise tax revenue as part of a fiscal fix that also includes long-term reductions in entitlement spending growth. A deficit-reduction panel set up by President Barack Obama last year recommended lowering top tax rates to 28%, in one scenario, while increasing federal tax revenue to about 21% of GDP.

Rep. Richard Neal of Massachusetts, a top Ways and Means Democrat, said Mr. Camp's proposal faces difficult going. "As long as tax reform is offered in the abstract, everyone rallies to the cause," Mr. Neal said. "When it becomes specific, people start to fall off."

Current top tax rates for corporations and individuals stand at 35%, although many people and businesses pay lower effective rates due to a range of deductions and other breaks.

Many Democrats also have voiced support for lowering tax rates, particularly for corporations. In his State of the Union address, President Barack Obama expressed support for lowering corporate tax rates while closing loopholes and other special breaks. The president also talked about the need to simplify the individual code. Mr. Obama's budget proposes raising taxes on high-income earners after 2012, however.

White House and Treasury officials have focused on achieving corporate-level reform in the near term. That's a strategy that could spare corporations from some of the pressures of deficit reduction. The White House declined to comment on Mr. Camp's proposal.

Tax experts said lowering tax rates to 25% might require Congress to find $2 trillion in new revenue over a decade if Mr. Camp wants to offset the entire cost, reflecting the magnitude of the rate changes. Aides said the rate reductions would be achieved by reducing or eliminating tax deductions and credits.

Aides didn't specify which ones would be targeted. The largest deductions include those for home-mortgage interest and state and local taxes, and the exclusion of employee health care from income. Big corporate breaks include accelerated depreciation deductions and a tax break for domestic production.

Michael Ettlinger, vice president for economic policy at the liberal Center for American Progress, said the plan would produce unsustainably high deficits because neither political party is able to make spending cuts that would allow the U.S. to function on the tax income Mr. Camp's plan suggests. "There is no way we can provide anywhere near the services that the public demands at those levels of taxes," Mr. Ettlinger said.

Mr. Camp and his Senate counterpart, Finance Committee Chairman Max Baucus (D., Mont.), have ordered studies of some elements of the current tax code, including tax treatment of debt versus equity financing, as well as tax treatment of certain financial derivatives.

A tax overhaul is emerging as an increasingly urgent goal. Businesses complain that federal tax rates are among the highest in the world, following years of reductions in Europe and Asia. That is hurting U.S. multinationals' competitiveness overseas and tamping foreign investment in the U.S., analysts say.

At the same time, policymakers are eager to boost U.S. growth, not only to generate jobs at home but also to increase federal tax receipts and reduce government budget deficits.

The top U.S. tax rate for both individuals and corporations has been 35% for most of the past decade since President George W. Bush pushed through his big tax cut for individuals in 2001. Previously, the top rate for individuals was 39.6%. Mr. Obama proposes to return the rate for individuals to 39.6%.An analysis by the conservative Heritage Foundation concluded that reducing the corporate rate to 25% would help generate more than 500,000 jobs a year over the coming decade.

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