Search

Ten guidelines that must be followed by anyone who attempts to guide serious tax reform are considered.

An argument for tax simplification is presented. Topics include the relative importance tax policy must play in comparison with other government functions; competing principles of government; the need to reform the legislative process, with the use of periodic reports on current law and formal attention given to the concept of simplicity when testimony is conducted on proposed laws; popular support for simplicity; and the impact support for alternative minimum tax reform may have on reducing tax complexity.

Government revenue growth in the 1990s is due in part to income disparity between wealthy and nonwealthy classes. Wealthy classes were taxed at a progressively high rate, which increased revenues. The marriage penalty also contributed for households with two high wage earners. However, the income disparity may not continue to grow. It may be reduced, and an economic field of more equitable income distribution may create consumption power that will promote further economic growth, which will increase tax revenues.

Congress included complex conditions in its 1998 retirement saving incentive programs along with the expansion of money eligible for deductions. To make the programs work, Congress must reduce administrative costs and the multiple layers of rules and regulations directing these diverse programs. Congress must reduce the complexities of these programs before the programs can produce increased retirement savings.

The IRS reform efforts should include reduced frequency of testimony from upper management to Congress in exchange for information channeled through congressional staff, the ability to match salary with expertise and IRS involvement in tax legislation. The creation of demonstration tax forms during legislative consideration would also improve simplification. The private sector board could be one of many reforms that would reduce unreasonable demands on the IRS and improve tax administration.

A sample study of 2,600 Aid to Families with Dependent Children (AFDC) households reveals the negative impact of the tax rate structure on welfare recipients entering the job market. Full-time low-income wage earners can face tax rates above 75%, even when they begin to move beyond minimum wage levels because of the loss of AFDC, Medicaid, and earned income tax credit (EITC) benefits. Workers who progress to salary levels twice the minimum wage face high rates due to the combination of direct income and social security taxation and the corresponding decreases in EITC, housing, and Medicaid subsidies.

Generational accounts of the effects of fiscal policy, which offer long-term forecasts, should be more common. The five-year period now studied, using a cash basis, omits too many economic factors to provide reliable estimates. Though generational accounts and other long-term economic forecasting methods have their shortcomings, they could be used as reliable long-term estimates of the positive or negative economic effects of fiscal policy decisions.

The Treasury Department's Office of Tax Analysis (OTA) has published four research papers for the first time since 1989. The papers deal with the long-term benefits of cuts in capital gains taxation, the influence that taxation has on donations to charity, the influence that repatriation taxes have on international business enterprises and the statistical makeup of estate transfers from decedents to their heirs. The OTA's findings can influence public policy, and the timing and content of their publications can indicate policy shifts within government.

The social security tax needs to be reformed as it has become less and less progressive over time and still fails to meet the needs of a growing elderly population. Currently, people receiving their social security benefits live better than the people paying social security taxes, but by the time the people paying taxes are old enough to collect, the social security trust may be close to empty. Efforts to find a more progressive means of funding social security, including an increase or decrease in the tax rate, a change in benefits, the elimination of tax preferences, and non-payroll-tax financing schemes, are discussed.

An historical present value accounting analysis of social security taxes and distributions reveals that, in the past, the redistribution of income through social security has been neither progressive or equitable. Because of early concerns over strengthening the economic image of the program and setting replacement rates, high-income earners, especially one-earner couples, have received a return on their contributions that is higher than any other group. In the future, such high-income earners will not receive as much as they contribute, but will still see benefits in their net tax rate. This suggests that the distribution of the money, not a lack of funds, is the social security system's major flaw.

The US social security system needs to be reformed for a number of reasons, and it is important that reform take place as soon as possible to ease the burden it is likely to place on taxpayers. An increase in the population, early retirement and a longer life-expectancy have all put preassures on the social security and medicare systems. Projections show that these trends will continue, further increasing the actuarial deficits the system faces. Furthermore, as more people need their social security payments, the federal government will have to scale back its use of social security funds for other programs. Changes are inevitable and should be made as soon as possible.

Social Security payroll taxes fund old age and survivors insurance, disability insurance and medicare costs. The tax rates for social security have increased at an average of 3% a decade since the 1950s, to their current 15.3% rate. Health care and tax reform concerns in Washington will likely result in social security reform, meaning the logic behind social security and the benefits it brings need to be clearly understood by legislators and the public. The history of the system, including changes in tax rates, costs and spending, is discussed in detail.

The Budget Act of 1990 was a compromise to deal with the recession of 1990 and the budget deficits from 1988 and 1989. A goal was set of cutting $500 billion from the federal deficit over five years. The act was the most significant tax law since the 1986 Tax Reform Act, and a major accomplishment of the President and Congress. However, no major changes in tax laws resulted, and emphasis was shifted to directly charging for services to taxpayers.

The changes in tax laws during the 1980s will have a lasting effect on the future. Improvements were made in the efficiency and equity of taxation. The tax base was broadened and marginal rates were lowered. Incentives for tax shelters and unproductive investments were reduced. The tendency of tax increases for families, the poor and low incomes was reversed.

The Tax Reform Act of 1986 failed to eliminate unequal tax differentials while complexity was increased. The expansion of the individual tax base was too limited, and there was no inflation indexing of income measures. New problems included a capital cost increase, a raise in effective tax rates and the addition of sources other than income to the tax base. New complexities resulted from the alternative minimum tax, passive activities, interest payments, international income and the time value of money.

The Tax Reform Act of 1986 was the largest revenue-neutral change in taxes in the history of the country, with a progressive result. Taxation of low incomes was reduced although unemployment insurance became fully taxed. Asset allocation and investments were improved by reducing differences in treatment between old and new businesses. Expenditures were reduced, which allowed rate reductions and more personal exemptions. The reforms helped economic growth.

Tax reform in the 1980s was pushed through by a coalition of conservatives and liberals. Two issues were sufficiently critical to allow consensus to form. One was the need for greater tax exemptions for the poor and families. The second issue was the failure of tax shelters and arbitrage to stimulate economic growth, while causing administrative complexity for tax filers and collectors. The tax shelter issue was combined with a move to lower tax rates for fairness, and political consensus was reached.

The growth of the income tax system followed the expansion of the system during World War II, and continued until the changes of 1981-90. Postwar changes in levels of taxation saw the most growth in state, local and Social Security taxes, and a decline in corporate and excise taxes. The individual income tax base expanded, and the tax-exempt threshold declined. Average income tax rates rose as prosperity grew and people earned more. Capital income taxation got very complex, with inflationary effects requiring frequent changes.

The tobacco settlement appeared ready to set higher taxes on cigarettes that would match excise tax rates from a few decades previously. The settlement did not, however, associate the tax rate in accordance with inflation. Cigarettes prices will fall into an affordable range for young people if lower taxes allow cigarette prices to decrease as a percentage of personal income.

The US president should adopt an aggressive budget strategy in 1997, facing long-term problems head-on despite the immediate political costs. The president will need to articulate a vision revealing how educational, emergency, and urban programs are losing potential spending dollars to built-in growth in older programs, such as social security. The American people need to see the preferences built into the budget so that the nation can truly determine if tax revenues are being properly allocated and, if not, what changes may be needed.

A health insurance purchase tax credit proposal should not be deterred by complaints that the proposal fails to do enough and fails to use employers as intermediaries, or fears of administrative and transitional difficulties. This major health care and tax reform would eliminate the regressive and costly exclusion for employer-provided health care insurance. However, the employers' intermediary role in the insurance market should be maintained. The attribution of employer-provided insurance value could be based on the capped model used to determine federal employees' health care benefits.

The employer-provided health insurance tax exclusion should be replaced with an equal value personal credit to buy insurance, supplemented by imposition of income-based surtax penalties on taxpayers not buying insurance. Alternatively, the existing exclusion could be capped rather than totally eliminated, and a purchase credit made available. A system of credit and penalties to subsidize insurance purchases would lead to wider and more cost-effective coverage while eliminating an expensive tax subsidy.

Welfare and AFDC recipients are burdened with tax rates that actually discourage full-time work by phasing out needed benefits such as food stamps, housing subsidies, and Medicaid. The earned income tax credit benefits the working poor the most at minimum wage levels, but phases outs at higher income levels. The best approach for low-income wage earners may be to work part-time, for example 30 hours a week at minimum wage, while remaining eligible for Medicaid or similar benefits.

The economic issues of tax policy and public finance have changed in the last 20 years although topic areas have remained the same. Tax and spending policies have become closely connected as government trust funds have grown, while capital gains and consumption taxes have gained attention. Academics have competed with government economists to analyze reforms and tax policy has become part of fiscal policy while monetary policy has evolved to consider debt.

Issues concerning the implementation of temporary tax incentives meant to stimulate the economy are examined, focusing on the relationship between the time in which the incentives end and the economic impact they have. Topics include the manner in which incentives are economically different for established business and start-up organizations that rely on innovation; and the manner in which the temporary time period affects business accounting decisions and adds to accounting complexity.

The manner in which charities should administer funds to disaster victims is examined, focusing on the special case that has arisen with the terrorist acts of Sep 11, 2001, and the lessons that can be learned from principles of public finance. Topics include principles that consider greatest need, equal justice, individual equity, and efficiency, and the conflicts that can arise among them.

Issues concerning tax reform proposals that will arise on the national political agenda after the passing of the 2001 tax cut bill are examined, focusing on an argument that tax simplification should be the tax policy priority. Topics include the research tax credit, alternative minimum tax, and the political advantages Pres George W. Bush would gain by advocating tax simplification.

Social and political issues that will affect private pension fund reform in the 21st century are examined. Topics include continual changes in types of plans employers offer, relationship between private pensions and social security reform, the large percentage of the population without a substantial private pension, and the role an increasing demand on the labor force will play in pension plan reform.

Pres Bill Clinton's proposal to create universal savings accounts (USAs) is an example of presenting in a soundbite a policy idea, with its cost already fixed, before the design for the policy idea has been thoroughly constructed. This soundbite-to-estimate-to-design process contrasts to the traditional process of designing the policy, estimating its cost, and then creating a soundbite. Policies should be designed before cost implications are discussed so that legislators can ensure policies are abiding by fair and efficient principles.