Newlywed tax tips for Bristol and Levi
Estate tax inching along

Tax cuts or total tax reform?

The Senate Finance Committee's hearing yesterday ostensibly was about whether and how to extend the 2001 and 2003 tax cuts that are expiring at the end of this year.

But as the testimony was presented and the Q&A followed, there was a sense that many folks see the impending tax laws deadline as a great opportunity to tackle a total tax system overhaul.

Comprehensive tax reform is the political Holy Grail. Everyone is searching for a tax system that's fair, simple and raises enough money to pay for programs that the citizenry wants without making them feel like they're over paying.

Good luck with that.

Sen. Ron Wyden, the Oregon Democrat who, along with Republican colleague Sen. Judd Gregg of New Hampshire, introduced the Bipartisan Tax Fairness and Simplification Act of 2010 (S. 3018) earlier this year.

At yesterday's hearing, Wyden prodded the expert witnesses for advice on how to jump start a broader bipartisan approach to tax overhaul. The goal, said Wyden, is tax fairness and incentives, coupled with principles from both sides of the political aisle.

Keep it simple: The consensus on attaining that goal is to begin with more simple filing.

"Voluntary compliance is core," said Douglas Holtz-Eakin, president of American Action Forum in Washington, D.C., and that's achieved when taxpayers view the tax code as fundamentally fair.

To that end, said Holtz-Eakin, Congress should aim for creation of a form that taxpayers are able to fill out themselves because it's not so complicated.

Frustrated man doing taxes

Donald Marron, director of the Urban-Brookings Tax Policy Center in Washington, D.C., agreed that simpler filing would enable taxpayers to better understand their tax responsibilities.

In the short run, added Marron, Congress must consider the stimulus effect of tax cuts for the middle class. But longer term growth, he said, would benefit from lower overall rates and by "filling in the Swiss cheese" of tax loopholes in our system.

But, noted Wyden, "the troubling aspect is that we start simple and then it starts unraveling with everyone wanting to add exemptions, deductions. How can we make it harder to unravel it while acknowledging that no current Congress can stop a future Congress from making changes."

Who knew Shakespeare was a tax prophet when he wrote, "perchance to dream: ay, there's the rub."

Finance Committee Chairman Sen. Max Baucus (D-Mont.) acknowledged the calls for overall reform and said "we will work on that soon."

Another temporary, targeted extension: Baucus also noted that he liked panelist Leonard Burman's proposal to extend temporarily the 2001/2003 tax relief provisions to give lawmakers time to work on comprehensive reform.

Burman, the Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell School, University of Syracuse, N.Y., said that when the tax cuts were proposed with the Dec. 31, 2010, sunset date, he originally viewed the move with "skepticism, as a budget gimmick."

"But in retrospect," Burman told the Finance Committee, "it turned out to be brilliant. It now allows us to reexamine the policies"

Burman opposes permanent extension of the Dubya-era tax provisions: "The tax code is a mess -- complex, inefficient -- why would we want to carve that in stone?"

More to the point, added Burman, budgetarily we can't afford to extend all of the expiring cuts.

But continuation of the middle class cuts, say for three years (which got Baucus' attention), could help sustain a move for tax reform, he said.

More on each panelist's perspective on the expiring tax laws can be found in their written testimony. Those documents are available, along with the opening statements from Committee leadership and a video (almost three hours!) of yesterday's proceedings, at the Senate Finance Committee's special Web page on the hearing.

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1. All persons residing in the U.S. shall come together in units for the purpose of reporting all income from any source, each item to be identified by payer's and payee's tax number. Members of a unit need not be related, need not reside together, and a unit may consist of as few as one person. With equality as the primary goal, this act established units to be taxed, so that all persons, whether related or not, legally here or not, are taxed equally.
2. Each year congress shall set by legislation a "minimum wage" and a "tax rate".
3. The following income shall not be subject to taxation:
• An amount equal to a year's earnings at the minimum wage rate, for each adult (age 20-65) member of the unit, decreasing 10% per year to 50% at age 15 and increasing 10% per year to 150% at age 70.
• All payments for what is classified as necessary health care for all members of the unit including medical care, any pharmaceuticals prescribed by a recognized health care professional, vision and hearing aids, and membership fees for health-enhancing entities such as gyms or other exercise facilities. Health care insurance premiums may be deducted but not health care expense paid for by such insurance.
• All educational expenses including day care for young children or legally incompetent persons, that portion of state and local taxes identified as spent on education, that portion of parochial school tuition, fees and other expenses identified as going for non-sectarian education, tuition, fees and educational materials for private school education at any level, and a per-diem allowance for students traveling more than 50 miles from primary residence for education.
• All income saved into an identified account from which investments may be made.
This encourages growth of the tax base, thus growth of the government's ability to pay for its responsibilities, by fostering health care, education and investment, all of which contribute to growth of income, taxable to support legitimate government purposes.
4. The "tax rate" shall be applied to any income over and above the deductions listed above, regardless of amount. It seeks the elusive concept of fairness by taxing at the same rate all "disposable" income.
5. There shall be no federal tax on corporations or other business entities. Products made in the USA will be more competitive in the world market by eliminating taxes as part of their cost All taxes will be directly, and transparently imposed on those who have always paid them, the consumer.
6. The Office of Management and Budget shall compute revenues to be expected using the newly set tax rate and minimum wage, applied to the previous year's reported incomes. No expenses in excess of that amount may be authorized or made by the federal government without approval by 75% of each house of Congress. It sets the Federal budget to produce a surplus in times of economic expansion and a deficit in times of contraction to promote economic stability.
7. At the request, by legislation duly enacted by a municipality having greater than 100,000 inhabitants or a state, a surtax may be imposed on citizens of that municipality or state which shall be applied in a manner exactly as applied for the Federal tax. It recognizes disparity in cost of living among various locations. It facilitates sufficient sources of revenue for states and municipalities.
8. For units whose deductions exceed total income, the Federal Government shall make payment equal to the tax rate multiplied by the shortfall in income, as shall municipalities and states. This addresses aid to the truly needy.

Your suggestions sincerely requested. E-mail them to [email protected].


Drew, consumption taxes were mentioned, but primarily in passing. But you raise a good point. I'm now working on a blog on the hearing comments about this type of taxation. Thanks for the extra work! ;-) Kay


Maybe I missed it, but no mention of a "flat" tax, or consumption tax? While I doubt any of the plans being floated will work 100% as well as they are touted, it would be nice to see our elected officials consider ALL the options for tax reform.

Great blog, thanks for your work.

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