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Tax reform proposal finds a host of critics.

The report by the President's Advisory Panel on Tax Reform, released November 1, checks in at more than 220 pages and includes a host of recommended changes to the way in which individual and business tax revenue is generated. As directed by the President, the Panel developed recommendations that would emphasize simplicity, fairness and growth. The Panel was also tasked with developing a system that would raise approximately the same amount of money as the current tax system.

Given these parameters, the Panel developed two options: A Simplified Income Tax Plan and a Growth and Investment Tax Plan. The Simplified Plan would, in the Panel's words, "dramatically simplify our tax code; clean out targeted tax breaks that have cluttered our system, and lower rates." The Growth and Investment Plan builds on the Simplified Income Tax Plan and "adds a major new feature: moving the tax code closer to a system that would not tax families or business on their savings or investments."

The Panel's numerous recommendations for individual tax reforms have proven controversial. To begin with, the Panel suggested eliminating or capping several popular deductions, such as eliminating the home mortgage interest deduction and replacing it with a 15 percent limited credit. Also eliminated would be state and local income tax deductions, and a $11,500-per-family cap would be placed on the employee exclusion for employer-provided health care.

On the positive side, the Panel recommended eliminating the individual alternative minimum tax (AMT), which it calls "the most vivid example of the wasteful complexity that has been built into our tax system to limit the availability of some tax benefits." Eliminating the AMT, the Panel concluded, would free millions of middle-class taxpayers from filing the forms and making the numerous calculations required to determine their AMT liability.

The Panel also had a host of recommendations for business tax reform. To begin with, small businesses with gross revenue under $1 million would simply report tax income as cash-in minus cash-out, with all spending--except spending for land and buildings--written off immediately. All businesses with receipts over a minimum level would be required to maintain bank accounts separate from a personal account, with all business receipts and expenses paid, and with activity and credit card payments summarized at yearend. Businesses with less than $10 million in gross revenue would enjoy the same rules with the exception of depreciation of assets, with two categories for real estate and two categories for other property.

For businesses with gross revenue over $10 million--including large partnerships, these account for more than 90 percent of corporate income tax collections--the tax rate would drop to 32 percent. Assets would fit into four categories instead of nine, which should produce approximately the same tax results with less complexity and controversy.

For multinationals, the simplified income tax system would include a territorial system, meaning a U.S. corporation would pay no tax on income for operations--except highly mobile entities like passthroughs. Income could be repatriated tax-free, and the complex system of foreign tax credits would no longer be needed.

In response to the Panel's report, FEI's Committee on Taxation (COT) has submitted a comment letter to policymakers highlighting what it believes are the most important aspects of corporate tax reform. To begin with, COT stressed the importance of enhancing the global competitiveness of U.S. companies, and urged policymakers to refrain from increasing the tax burden on the business sector to pay for tax relief on the individual side.

COT also stressed the importance of crafting tax provisions that will encourage technological innovation. Many countries continue to provide tax incentives to attract research and development activities within their borders. Without comparable incentives, the U.S. will continue to lose valuable research jobs abroad.

Finally, COT encouraged policymakers to provide appropriate transition relief should any radical reforms be adopted. Companies must have time to plan for dramatic shifts to the way in which their income is taxed, especially, for example, the taxation of offshore earnings.

Congress has failed to embrace many elements of the Panel's report. Congressional Democrats have objected to many of the suggested individual tax reforms, noting that capping or eliminating deductions that benefit the middle class to pay for the revenue lost by eliminating the individual AMT hardly seems fair. Meanwhile, Congressional Republicans have expressed their disappointment that the Panel's report isn't more sweeping.

For example, many policymakers have endorsed replacing or modifying the income tax with a flat tax or a national retail sales tax. While the Panel does discuss a national retail sales tax, it concluded that such a tax was unworkable.

FEI will continue to monitor--and participate in--the tax reform debate. For more information on this issue, please contact Mark Prysock at the email below.

Mark Prysock (mprysock@fei.org) is FEI's Director of Public Affairs and General Counsel.
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Author:Prysock, Mark
Publication:Financial Executive
Geographic Code:8AUST
Date:Jan 1, 2006
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