Add Lines A - F and Write Sum on Line 583: Wishing for a Fair and Simple Tax System

A collective groan rattles the nation when tax time comes around. Even if we’re getting a refund, the intricate paperwork encourages many of us to put off the task until the last minute. (Ever stood in line at the Post Office on April 15th?) Many pay professional tax preparers because the thought of calculating deductions A-Q and filling out special worksheet C498-A is too daunting.

In fact, America spends about $140 billion per year on professional tax preparation. That’s about the equivalent of NASA’s budget.

Recognizing the complexity, inefficiency, and inequity of the current tax code, President Bush established a bipartisan panel, to study the tax system and propose options to make it simpler and fairer.

This group, the President’s Advisory Panel on Federal Tax Reform, was formed at the beginning of 2005 and began to release their findings and recommendations to the public in early October.

Although the full report won’t be released until November 1, 2005, policy wonks and tax experts are already starting to debate many of the panel’s ideas.

Mortgage interest deduction

The panel found that many tax breaks for homeowners, including the mortgage interest deduction, disproportionately benefit the wealthy, encouraging them to buy bigger homes while doing little to help lower-income workers to afford a mortgage.

The panel may recommend changing eligibility limits for the deduction, since current tax law allows for a $1 million limit. Lowering the limit according to geographical region would prevent wealthier home owners from receiving large deductions.

Some say that the current law is partially responsible for rising home prices and may push middle and working class families into high-risk mortgage loans.

The White House has not yet commented on whether a change in the mortgage interest deduction would confirm or threaten Bush’s vision of an “ownership society," but Spokesman Scott McClellan stressed that the panel has not yet released its report. McClellan emphasized that the Bush administration believes that the tax code should encourage home ownership and charitable giving, but he did not give details.

Health and taxes

The panel may also recommend changes to tax laws relating to health insurance. Currently, employers get deductions for providing their workers with health care, and workers with benefits are not taxed for the value of those benefits or for their contributions to them.

Along with many health and tax policy experts, the panel believes that these regulations may be a primary cause of rapidly inflating health insurance and medical costs.

The Office of Management and Budget estimates that untaxed employee health insurance contributions were worth $112 billion in 2004. Many consider this to be the largest tax break in the federal budget. Some say that this tax break benefits wealthier workers while harming middle and lower income workers without health insurance.

The tax reform panel may recommend a cap on tax-free health insurance, perhaps with a ceiling of around $11,000 for family coverage. According to a survey by the Kaiser Family Foundation, the average value of family health insurance is $10, 800; the tax would be applied to health insurance that exceeds this amount.

Of course the panel has not yet made its official recommendations, and lawmakers and experts have not had a full debate on whether taxing health insurance would raise or lower health care costs and the number of uninsured Americans.

Sales tax instead of income tax

Some say income taxes drag down the economy. These folks believe taxing purchases instead of income is the way to go. The president’s panel looked into this theory, but ultimately rejected it. The panel was concerned that a switch to sales tax would encourage tax evasion and super-high tax rates.

Edward P. Lazear, a member of the panel and an economist at Stanford University, said that to replace the income tax with a consumption tax would require a tax rate as high as 87 percent if goods like medicine, food, and clothing were not taxed.

What does all of this mean?

For now, it just means that the federal government recognizes current tax law as convoluted and unfair and that they are trying to find solutions.

No one knows yet what the panel’s official recommendations will be and if those recommendations will make it to the House and Senate.

But Americans can take some comfort in the advisory panel’s commitment to simplify tax laws, make taxes fairer, and promote long-term economic growth through an efficient tax code.

Right now, a fair and easy tax system may be just a dream, but it’s being discussed and broadcast, which may be the first step towards its realization.

What do you think?

How would you create a fair tax system? Should health insurance be taxed? Should expensive mortgages earn a tax credit? Do you struggle with understanding the deductions and credits applicable to you and your family?

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Article Posted on: 10/23/2005