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#450396 - 11/01/05 01:27 PM Issue under the radar: Tax Reform
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With all eyes on Supreme Court nominees, the CIA leak, and hurricanes, an important issue being considered by the Bush administration is not getting much press: Tax Reform.

The President's tax reform committee is publishing their recommendations for a massive tax reform that may include eliminating mortgage interest exemptions and writing off of state and local taxes.

Here's one of the few articles I've found on the subject:
USA Today
Panel offers final ideas for rewriting tax law
WASHINGTON (AP) Chosen to find a simpler way to tax the nation, a presidential panel on Tuesday recommended two designs that would rewrite virtually every tax law for individuals and businesses.
Treasury Secretary John Snow called the proposals "bold recommendations" but he did not indicate what ideas the administration would embrace.

"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," Snow said in a statement.

Under the panel's plan, most deductions, credits and other tax breaks would be eliminated along with much of the paperwork and equations that can baffle taxpayers, leaving a drastically simplified income tax.

Many, including the nine members of the presidential commission, have said key recommendations will be unpopular.

"The effort to reform the tax code is noble in its purpose, but it requires political willpower," the group said Tuesday in a letter to Snow. "Many stand waiting to defend their breaks, deductions and loopholes, and to defeat our efforts."

Snow told the Detroit Economic Club on Monday the nation's taxes need "not only theoretical reform, not only academic reform, but actual practical reform."

The President's Advisory Panel on Federal Tax Reform spent most of the year studying tax designs, including consumption taxes like a national retail sales tax. President Bush tasked the group with finding simpler and more economically productive ideas for taxation.

The commission wrapped up its work last month, and its ideas immediately attracted criticism some from those who wanted to see more change and some from those who felt the changes went too far.

Drawing particular criticism, the panel determined that tax breaks for homeownership be changed to spread their benefits to more middle-income families.

The panel would convert the home mortgage interest deduction into a credit equal to 15% of mortgage interest paid. The $1 million limit on mortgages eligible for the tax break would shrink to the average regional price of housing, ranging from $227,000 to $412,000.

Senate Finance Committee Chairman Charles Grassley, R-Iowa, said that idea is bound to be politically unpopular. "But its important to have a comprehensive starting point that will get everyone talking and thinking," he said.

In another major change, taxpayers could purchase health insurance using untaxed money up to the amount of the average premium, about $5,000 for an individual and $11,500 for a family, a change that caps currently unlimited breaks but would create a new tax break for those who do not get health insurance through work.

Under one plan, individuals would pay no tax on dividends paid by U.S. companies and exclude 75% of their capital gains from taxation. Under the second plan, all investment income would be taxed at 15%.

Both proposals would abolish the alternative minimum tax, a levy originally drafted to prevent wealthy individuals from escaping taxation but increasingly reaching into the middle class. They also would eliminate federal deductions and credits for mortgage interest, state and local taxes and education, among others.

The advisory commission would replace those withdrawn tax breaks with simpler benefits, including three savings plans that supplant more than a dozen provisions currently available for retirement, medical expenses and education.

Bush set certain limits on the panel, requiring that the new plans collect roughly as much tax money as the government collects now.

The proposals also had to retain the progressive system that taxes wealthier taxpayers at higher rates than poorer individuals and families. They were also required to recognize "the importance of homeownership and charity in American society."

The panel rejected frequently touted ideas to impose taxes on consumption, like a retail sales tax.

Instead, the group chose to use one recommendation to push for major simplification of the current income tax system. Its second recommendation makes changes for businesses that shift the nation's tax system toward indirect tax on consumption.

The changes allow every taxpayer to use a simpler tax form, less then half the length of the current Form 1040. Snow said that would also cutting in half the number of taxpayers who need to hire a professional tax preparer.

The tax-writing House Ways and Means and Senate Finance committees pledged to take a close look at the recommendations.


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Copyright 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Any thoughts on tax reform?
Last edited by Fightin' Blue Hen; 11/01/05 05:23 PM.
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#450397 - 11/01/05 02:29 PM Re: Issue under the radar: Tax Reform
Tesla Offline
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I couldn't read the article. What is the purpose for doing this?
Last edited by SkiDoo; 11/01/05 02:30 PM.
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#450398 - 11/01/05 02:34 PM Re: Issue under the radar: Tax Reform
Jokerman Offline
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Hen, let's be sure not to mischaracterize that one option. The proposal will apparently be to limit the deduction to the interest paid on mortgages up to $_____.

I don't know the exact number, but I believe it was somewhere around $300M? (Your link is behind a registration.)

We also ought to point out that this would be in exchange for lower rates.

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#450399 - 11/01/05 02:37 PM Re: Issue under the radar: Tax Reform
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I sent Connie Mack an email giving him my opinions but haven't heard back from him yet. I am curious as to his thoughts and what the recommendations will be today.
I completely disagree with changing or eliminating the mortgage interest deduction, but definitely support the National Sales Tax or a similar plan.
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#450400 - 11/01/05 02:38 PM Re: Issue under the radar: Tax Reform
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A national sales tax would eliminate the mortgage deduction...

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#450401 - 11/01/05 02:39 PM Re: Issue under the radar: Tax Reform
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The $300k limit in mortgage interest deductions is ludicris in the RE market I live in. The average house price here is hovering around $295k and rising daily. Honestly. My old house value went up $150k in the seven months since I sold it. While that makes me sick, it is a reality here and limiting the interest deduction would hurt - a LOT.
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#450402 - 11/01/05 02:41 PM Re: Issue under the radar: Tax Reform
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Quote:

A national sales tax would eliminate the mortgage deduction...




Yes, I am aware of that, but those were the two items that were of most importance to me. If we keep the income tax, don't limit the interest deduction, or completely eliminate the income tax and go to a sales tax or similar plan.
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#450403 - 11/01/05 02:44 PM Re: Issue under the radar: Tax Reform
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Oh, I wasn't trying to argue either way about whether or not to limit it.

My thinking, actually, is that you either keep it unlimited or eliminate it - don't go halfway.

I actually like the Steve Forbes plan - keep the current system, but allow people to opt into a flat tax without all these deductions. Once you opt in, however, you can't go back.

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#450404 - 11/01/05 02:56 PM Re: Issue under the radar: Tax Reform
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Interesting, haven't heard much of the Forbes plan, only the Neil Boortz (sp?) one on the radio and TV.

You know, the more I think about it right now, you may be correct there on first blush. When I was thinking about the Sales Tax plan, I wasn't sure how self employed individuals would be able to deduct their legitimate business expenses. Do you happen to know whether these would become moot or was there another plan for these individuals? I apologize for my ignorance.
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#450405 - 11/01/05 03:07 PM Re: Issue under the radar: Tax Reform
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Well, if you were a sole proprietor, and we went to a sales tax, you would have to collect sales tax on revenues (I don't know if they would exempt services the way most states do), but you wouldn't pay income tax, so I don't know how you would deduct anything. When you went to spend whatever portion of money that you made, you would pay tax on what you spend (unless the purchase was for something to be resold in your business).

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#450406 - 11/01/05 03:14 PM Re: Issue under the radar: Tax Reform
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Acutally, the proposal would convert the deduction into a tax credit, but the cap the amount at the average price in given markets, with regional tables and periodic adjustments built in.

I don't know if that simplifies the current deduction calculation, but that is what is proposed.

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#450407 - 11/01/05 03:22 PM Re: Issue under the radar: Tax Reform
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I think he was asking about schedule C deductions.

The credit you are discussing is the manner in which they would attempt to make a sales tax progressive. For example, a family of four earning $50M a year might receive a check for a couple grand, to offset most of what they pay in sales taxes. A family of four earning $1MM would, the theory goes, get the same check, but obviously they will pay many times more in taxes, assuming they spend any of their money.

The good thing about the national sales tax is its encouragement of savings.

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#450408 - 11/01/05 03:33 PM Re: Issue under the radar: Tax Reform
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Quote:

Oh, I wasn't trying to argue either way about whether or not to limit it.

My thinking, actually, is that you either keep it unlimited or eliminate it - don't go halfway. .....



Er, ..... it is already limited - to $1million mortgage, plus $100,000 HEL/HELOC.

If you want to limit the impact of the mortgage interest deduction then set it high (which is what has happened) then wait for inflation to do its worst, and over time the deduction will erode itself. ..... This is exactly what happened in the UK - the cap was set at around three times the price of a typical family home around 1980, but by the late 90's it was only worth around one third of a typical family home. At that point the government capped its effective tax deduction rate at 15%(below the basic tax rate, then around 22-23%), and stepped it down over a few years to 10%, and then 5%, and finally, it was gone.

Did this impact the value of homes? - not that you'd notice, house prices have more or less doubled in the past six or so years.
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#450409 - 11/01/05 03:56 PM Re: Issue under the radar: Tax Reform
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Quote:

Er, ..... it is already limited




You're right, I forgot. Bill Bradley's good deed.

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#450410 - 11/01/05 04:14 PM Re: Issue under the radar: Tax Reform
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Quote:

..... The good thing about the national sales tax is its encouragement of savings.



... the flip side of which would be the discouragement to spend/consume, which would have a profound knock-on impact on the balance of payments, which I'm sure will also be considered.

Even though I'd lose out significantly on the non-deductiblity of mortgage interest, if it led to an abolition of income tax I'd be very much in favor of a national sales tax as I am not much of a consumer.
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#450411 - 11/01/05 05:08 PM Re: Issue under the radar: Tax Reform
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Quote:

I think he was asking about schedule C deductions.

The credit you are discussing is the manner in which they would attempt to make a sales tax progressive. For example, a family of four earning $50M a year might receive a check for a couple grand, to offset most of what they pay in sales taxes. A family of four earning $1MM would, the theory goes, get the same check, but obviously they will pay many times more in taxes, assuming they spend any of their money.

The good thing about the national sales tax is its encouragement of savings.




Sorry I was talking about mortgage interest. The proposal would remove the mortgage interest deduction and replace it with a mortgage interest credit, with a cap tied to regional market prices.

There is currently an interest cap and an income phase out for the mortgage interest deduction.

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#450412 - 11/01/05 05:26 PM Re: Issue under the radar: Tax Reform
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I'm screwed with a national sales tax.

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#450413 - 11/01/05 05:27 PM Re: Issue under the radar: Tax Reform
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Actually, what are the thoughts regarding what this would do to consumption. J, I'm looking for your answer as it is the only correct one.

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#450414 - 11/01/05 05:45 PM Re: Issue under the radar: Tax Reform
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Quote:

Actually, what are the thoughts regarding what this would do to consumption. J, I'm looking for your answer as it is the only correct one.




Well, I certainly think that any considered opinion I arrive at is the correct one; otherwise, why would I bother, cagemaster?

It is undeniable that it would encourage savings by discouraging consumption. The degree of the effect would be a function of the new rate at which consumption was taxed, relative to the old rate at which income (whether consumed or saved) was taxed. But I wouldn't be able to tell you what the exact effect would be.

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#450415 - 11/01/05 05:57 PM Re: Issue under the radar: Tax Reform
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Seems good enough to me! Let's do a wholesale change!

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#450416 - 11/01/05 06:19 PM Re: Issue under the radar: Tax Reform
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Quote:

Seems good enough to me! Let's do a wholesale change!




I think you've mistaken my explanation of its impact for advocacy, cagemaster.

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#450417 - 11/01/05 06:55 PM Re: Issue under the radar: Tax Reform
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But it is sponsored by Bushie! How could it be wrong?

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#450418 - 11/01/05 07:18 PM Re: Issue under the radar: Tax Reform
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Don't be a jerk. I've never so much as implied that Bush doesn't make mistakes. (There's no doubt he's better than the alternative at the last election, but that's not saying much - tax reform wouldn't even have been on the agenda had Bush not won that election.)

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#450419 - 11/01/05 07:21 PM Re: Issue under the radar: Tax Reform
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You earned it, J. And you find it necessary to defend a lot of items under his watch.
Chicken or the egg as far as the tax debate and your aside goes.

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#450420 - 11/01/05 07:24 PM Re: Issue under the radar: Tax Reform
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By the way, cagemaster, my understanding is that there will be several options presented by this commmittee. Some of them I will probably agree with, others I won't. But the identification of the need to reform the tax code is to be applauded.

I defend those actions that I believe are appropriate, I criticize those that are inappropriate. (Unlike you and Chucky Schumer.)

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