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209 IRET Congressional Advisory 1 (2006)

handle is hein.taxfoundation/iretcgadv0206 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. September 20, 2006 Advisory No. 209 ANALYSIS OF TAX REFORM PANEL PROPOSALS (PART 2): LIMITATIONS PLACED ON THE PANEL SHAPED THE OUTCOME Introduction The President's Advisory Panel on Tax Reform issued its report in November, 2005. Many observers felt that the Panel's proposals looked too much like the existing income tax, and were disappointed that the reforms were not more sweeping. Before being too critical of the Report, however, it is important to remember that the Advisory Panel was operating under a number of legal and practical constraints. This paper will examine the constraints the Panel faced and their ramifications in some detail. In spite of the restrictions placed upon it, the Panel produced a work of high quality that will prove to be a major contribution to the tax literature.1 The Panel's Proposals The Advisory Panel's report is entitled Simple, Fair, and Pro-Growth: Proposals to Fix America's Tax System.2 The Panel recommended improvements in the tax system that would lead to significant gains in production and income, while greatly simplifying many aspects of the code. The Report provided an excellent discussion of two distinct concepts of the tax base - broad-based income versus consumption or consumed income. It described three alternative tax systems for individuals and businesses (two of which received the Panel's unanimous endorsement) that would be simpler and more pro-growth than the current income tax: 0 The simplified income tax would expand and consolidate personal saving arrangements and simplify business depreciation of capital assets. Marginal tax rates would be 15%, 25%, 30%, and 33% for individuals. The top corporate tax rate would be 30 percent. Outside of the saving plans, corporate income would be partially relieved of double taxation by excluding from individual taxable income those dividends paid out of U.S.-taxed corporate income, and by an exclusion of 75% of capital gains on U.S. stock held longer than a year. Exemptions, deductions, credits, and other code complexities would be eliminated, consolidated, or simplified. 0 The growth and income plan is presented as a largely consumption-based alternative. It would move to full expensing of capital investment for equipment, rather than depreciation. Its individual tax rates would be 15%, 25%, and 30%, and the top corporate rate would be 30%. However, it would keep a 15% tax on interest, dividends, and capital gains at the individual level in addition to the tax on the same income at the corporate level. The personal tax on saving would be partly offset by having the same saving plans as in the simplified income tax proposal, which would otherwise not be needed in a consumption-based system. - The full-blown consumed income tax (which had wide support on the Panel but was not unanimously endorsed) would do the most for growth and simplicity. All earnings of capital would be taxed at the business level, after full expensing. There would A * I 66~ I ~6I

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