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71 IRET Policy Bulletin 1 (1998)

handle is hein.taxfoundation/iretpbul0030 and id is 1 raw text is: January 16, 1998 No. 71 PHASE-OUTS ARE BAD TAX POLICY The tax code is littered with rules that phase out various deductions, exemptions, and credits as taxpayers' incomes rise. Some of the items that taxpayers lose with higher incomes are the deductibility of individual retirement account (IRA) contributions, the earned income tax credit (EITC), the exclusion of social security benefits from taxable income, a portion of itemized deductions, even the personal exemption. The Taxpayer Relief Act of 1997 (TRA-97) adds significant new phase-outs. Its two largest provisions, the child credit and tax subsidies for college students, are both conditioned by phase-outs. The tax code is littered with rules thatphase out various deductions, exemptions, and credits as taxpayers 'incomes rise ... Th e Taxpay er Relief Act of 199 7 (TRA -9 7) adds significant new phase-outs. Phase-outs create troubling problems in the areas of economic efficiency, simplicity, and fairness. Phase-outs raise marginal tax rates throughout the phase-out zone and, thereby, reduce incentives to work, save, and invest. Phase-outs make the tax code more complicated, which raises tax enforcement and compliance costs, both by making the tax code harder to understand and by making tax liabilities harder to compute. The instruction book that accompanies an individual's yearly tax forms includes an obstacle course of special instructions and worksheets testing whether various phase-outs affect the taxpayer and, if so, how much each relevant phase-out restricts the deductions, exemptions, or credits the taxpayer may claim. Further, although phase-outs are often called fair because they tend to increase tax progressivity, the arbitrariness and surreptitiousness of most phase-outs violates any reasonable standard of fairness. A Flock of Phase-outs Prior to this year's legislation, the individual income tax eliminated or restricted the following deductions, exemptions, and credits when taxpayers' incomes grew: the tax exemption for social security benefits, the EITC, the deduction for IRA contributions, the personal exemption, the Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote on the economic growth and efficient operation of the market economy. Economics of 1730 K Street, N.W., Suite 910 * Washington, D.C. 20006 Taxation (202) 463-1400 * Fax (202) 463-6199 e Internet www.iret.org

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