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The
President's Tax PanelThe Panel made far-reaching
recommendations for reform of the Tax Code in 2005
- but the proposals remain on the shelf, and probably
won't be taken down any time soon.
Although
this section presents a highly simplified account
of US taxation of corporations, in reality the Tax
Code is an enormous mountain of nightmarish complexity.
Politicians and businessmen alike want to fix it,
and during 2006 President Bush convened a Tax Panel
which took evidence and made proposals for root
and branch change of the Code.
In
September, the panel turned its attention to taxation
issues facing America’s corporate and small business
taxpayers during a meeting in Tampa, Florida.
In
testimony from several academics and tax law experts,
the panel heard how the current state of the US
tax code has placed an unfair and disproportionate
compliance burden on small firms, while growing
global competition and sophisticated tax planning
has allowed the corporate tax base to be eroded.
“Small
businesses and self-employed taxpayers, in particular,
are burdened by the complexity of our tax code and
bear a substantial proportion of the estimated $125
billion in compliance costs,” observed tax panel
chairman Connie Mack.
“These
costs create a disproportionate burden, as studies
have found that the smaller the business, the higher
the cost of complying with the tax code per dollar
of tax paid. We have heard from small business owners
from all over America who have told us that the
tax code should be reformed and simplified so that
these entrepreneurs can spend less time doing paperwork
and more time growing their businesses,” he added.
Meanwhile,
Douglas Shackleford, professor at the University
of North Carolina's Kenan-Flagler Business School
noted that the US corporate tax base is “under attack
from many directions”.
"Despite
a decade of record profits, the corporate income
tax never recovered to the levels of the less prosperous
1970s,” Shackleford stated in his testimony.
However,
he observed that the decline of the corporate tax
sector has been a global phenomenon, caused by growing
international competition which has affected “all
countries' ability to extract corporate tax dollars".
Other
factors which have contributed to falling corporate
tax revenues according to Shackleford included:
the rise of the knowledge economy with its associated
intangible assets; growth of ‘S Corporations’ and
partnerships that “pass through” taxes; deductions
from employee stock options; and the formulation
of tax shelters.
Shackleford
told the panel that the success or failure of future
tax reforms can be measured by a corresponding decline
or growth in the country’s tax planning industry.
"The
key to reducing the need for tax accountants and
lawyers is the elimination of differences in tax
rates. Whenever you tax the same income differently,
you provide an opportunity for a planner to reduce
taxes," he observed.
In
November the Panel
recommended two options for simplification of the
US tax code in its final report.
The
two plans differ on the taxation of businesses and
capital income. Although they use different approaches,
the nine member panel of academic, legal and tax
experts chaired by former Republican Senator for
Florida Connie Mack said that the plans share a
common goal of providing simple and straightforward
ways for Americans to save free of tax while lowering
the tax burden on productivity-enhancing investment
by businesses.
The
first plan, known as the Simplified Income Tax Plan
proposed to:
Reduce
the number of income tax brackets to four at
15%, 25%, 30%, 33%.
Exclude
100% of dividends of U.S. companies paid out
of domestic earnings.
Exclude
75% of corporate capital gains from US companies
(the tax rate would vary from 3.75% to 8.25%)
Tax
interest at regular income tax rates.
Tax
small businesses at individual rates (top rate
lowered to 33%).
Tax
large businesses at 31.5% under a territorial
system with simplified accelerated depreciation.
The
second plan, known as the Growth and Investment
Tax Plan, proposed:
Three
tax brackets: 15%, 25%, 30%.
Dividends,
capital gains and interest income all taxed
at 15%.
Sole
proprietorships taxed at individual rates (top
rate lowered to 30%).
Other
small businesses taxed at 30%.
Large
businesses taxed at 30% on a destination basis
with expensing for all new investment.
Interest
paid and received will be non-deductible except
for financial institutions.
Under
both plans, a number of further measures would be
applied to individual taxation. Both proposals would
allow every taxpayer to use a simple tax form, less
than half the length of the current Form 1040.
The
Panel also developed and considered a progressive
consumption tax plan that would be administered
using the infrastructure of the current tax system,
but was unable to reach a consensus to include it
as a recommendation. In addition, The Panel also
discarded ideas for a value-added tax and a national
retail sales tax.
Then
Treasury Secretary John Snow was set to deliberate
over the panel's proposals before making recommendations
to President Bush as to which parts of the report,
if any, to adopt.
"The
recommendations that they (the tax panel) are presenting
today will begin the dialogue that will help shape
the future of tax policy," Snow said. "Their
advice is the starting point, and I look forward
to reading their recommendations and considering
them carefully before I make a recommendation to
the President based on the excellent work carried
out by this Panel," he added.
In
December, 2005, however, it transpired that the
Bush administration was considering delaying the
unveiling of a broad tax reform proposal while the
Treasury continued to deliberate on the recommendations
of the tax reform panel, in order to avoid having
to sell a controversial policy initiative during
a mid-term election year.
John Snow said that government would not be held
to an "artificial timetable" with regard to tax
reform. "We
will be looking hard at the whole question of tax
reform," Snow told reporters in Washington D.C.
"I
don't want to foreshadow what we will be recommending
to the president," added the Treasury Secretary.
In
the spring of 2006, Snow said that his department
remained "busy" working on proposals for simplification
of the US tax code.
"At
the Treasury Department we are quite busy working
on tax reform, carefully considering the options
provided by the Tax Panel," Mr Snow stated in response
to a question posed in an online interactive forum
known as "Ask the White House."
However,
Mr Snow once again reiterated that the Bush administration
was in no immediate hurry to forge ahead with tax
reform. "Reform of the code is so important and
the opportunity to really improve it only comes
around every twenty years or so, so we want to be
sure that we get it right. So at this time we must
consider all options carefully and be sure that
we are creating a more simple and fair tax system
for all," he explained.
In
February 2008, senior House tax writer, Charles
Rangel suggested that President Bush had missed
his last opportunity to bring about meaningful and
lasting reform to the US tax code with a budget
that proposed "more of the same" tax cuts
for the wealthy and spending cuts for essential
entitlement programs.
"President
Bush’s budget proposal is what we expected,
but not what we need," the House Ways and Means
Committee Chairman commented in response to Bush's
2009 Budget proposals.
He
continued: "Rather than embrace his last months
in office as an opportunity for bipartisan achievements
on critical areas such as tax reform, health care
and economic security, President Bush’s budget
offers more of the same – expensive tax cuts
for the wealthy, devastating cuts to Medicare, erosion
of employer-based health care, retirement benefits,
Social Security privatization and cuts to other
social services."
While
Bush could have been remembered for bringing about
much supported simplification of the US tax code,
something he pledged early in his presidency, Rangel
believed that the administration’s legacy
"will be written in red ink".
"In
fact, this budget offers little or no mention of
the pressing need to simplify our tax laws. Despite
the attention the President gave this issue in the
beginning of his term, we have not seen any concrete
proposals or leadership on tax reform during Bush’s
seven years in office. I would argue that it is
not too late to do the right thing and reach out
to Congress to begin serious discussions and restore
equity and fairness to our tax code," Rangel
stated.
"I
have introduced a reform proposal that would cut
taxes for more than 90 million lower- and middle-class
families while also reducing the corporate tax rate
to help keep our companies competitive internationally.
I plan to continue this overdue discussion with
hearings in the near future and I strongly urge
this Administration to use its remaining time in
office to be a partner, not a roadblock, toward
establishing bipartisan consensus on tax reform,"
he added.
Tax
reform issues also came to the fore in April 2008,
when Senate Finance Committee Chairman Max Baucus
(D-Mont.) kicked off a series of hearings on tax
reform with a look at America’s income tax
code, and announced plans for future hearings and
roundtable sessions to prepare for a comprehensive
overhaul of the tax code in 2009.
The
Finance Committee has jurisdiction over US tax policy,
and Baucus argued that this year’s look at
America's tax system and reform options should produce
a set of principles to guide the work of the Committee
– and a new presidential administration –
on tax reform next year.
“The
Finance Committee needs to be informed and ready
to go in January 2009, and that means we have to
work hard now. We have to first understand pretty
comprehensively how the system works today. We have
to talk about the natural tensions in tax reform,
and what actually happens to working families, to
American businesses, and to our country’s
global competitiveness depending on how we change
the code,” stated Baucus, continuing:
“Even
in a year where much won’t get done legislatively,
we can build a framework of knowledge on which to
review options and proposals when it’s time
for tax reform.”
But
when will that time come? The Obama administration
in 2009 is grappling with health-care to the exclusion
of almost all else, and it seems almost inconceivable
that any kind of bipartisan support for major tax
reform could be assembled in the increasingly polarized
Congress.
The
President's Tax PanelThe Panel made far-reaching
recommendations for reform of the Tax Code in 2005
- but the proposals remain on the shelf, and probably
won't be taken down any time soon.
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