Family Friendly Tax Reform

Testimony of Paul Weinstein Jr.Chief Operating Office and Senior Fellow

The Progressive Policy Institute

President’s Advisory Panel on Federal Tax ReformMay 11, 2005

The problem

• The tax code is too complicated – 70 percent of Americans think the federal tax system is too

complicated* – Redundant tax breaks for individuals. 16 IRA type accounts, 5 college

tax breaks, and 4 incentives to help raise kids **– Since 1986, more than 84 new tax laws have been enacted ***

• Tax compliance is costly – According to the Department of the Treasury the total cost of tax compliance is $115 billion per year****

• Middle class burden – According to Gale, Orszag, and Shapiro about 80 percent of households, including a large majority of households in every income quintile, will end up worse off over time as a result of the enactment of the 2001 and 2003 tax cuts*****

*Associate Press/IPSOS Poll April 4, 2005**“Weinstein, Paul, “Universal Pensions”, PPI Paper, February, 2002***Schnepper, Jeff, “Why the Tax System Drives Me and You Crazy”, MSN Money****Memorandum for Treasury Secretary Paul O’Neill from Pamela Olson, Department of the Treasury, November, 2002*****The Ultimate Burden of Tax Cuts: Once they are Paid for, Low- and Middle-Income Households Likely to be Net Losers, On

Average, Urban/Brookings Tax Policy Center and Center on Budget and Policy Priorities, June, 2004

Goals for tax reform

• Make the system more generous

• Reduce confusion

• Treat everyone the same/level playing field

• Streamline the tax code

• Require taxpayers to do less paper work

• Deficit neutral

Family Friendly Tax Reform

• Creates four super incentives– College Tax Credit– Home Mortgage Deduction for All– Family Tax Credit– Universal Pension

College Tax Credit

• $3000 refundable credit• Covers tuition and fees for 4 years of college and 2

years of graduate school• Substitutes for 5 existing breaks• Available to any student attending accredited

college/university more than half time, and willing to commit to 2 summers of service

• No phase-outs.

Home Mortgage Deduction for All

• Moves the deduction “above the line” and makes it available to non-itemizers

• 10 million more taxpayers benefit• Most of the benefits will go to those with incomes less

than $50,000• Makes deduction available to all homeowners

Family Tax Credit

• Available for families with incomes up to $120,000• Eliminates 200 pages of code• Combines 3 tax incentives (Earned Income Tax

Credit, Child Credit, and the Child and Dependent Care Credit) into 1

• Provides a maximum credit of $3,500 for a family with one child, $5,200 for two children, and a $7,000 tax credit for a family with 3 children

Universal Pension• Combines 16 different IRA type accounts into one

universal pension• Americans of all income levels could participate• $3000 contribution limit• Every American receives a $500 stake• Refundable credit for contributions by low income

workers• Portability – 401k balances would automatically

transfer into UP when workers change jobs

Benefits

• Provides $436 billion in new tax relief (over ten years) for college, homeownership, families, and retirement

• Reforms tax code by eliminating 68 tax provisions into 4 and reconfiguring $2.5 trillion in tax incentives

• Simplifies the code by removing complicated phase-outs, multiple definitions, and eliminating at least 200 pages of the code

• Reduces number of itemizers by making all four incentives “above the line”

• Makes the code more progressive by closing tax breaks for special interests and using the savings for tax incentives that can benefit all Americans

• Deficit neutral

Paying for Family Friendly Tax Reform (In Millions)

COLLEGE TAX CREDIT $175,000

OffsetsExisting college benefits to be consolidatedHope Scholarship and Lifetime Learning Credit 54,000Deduction for higher education expenses 24,000Employer-provided education benefits 8,000Qualified tuition savings accounts 6,000Special interest incentives to be eliminatedCorporate shelters for highly mobile foreign income 55,000Corporate loophole for janitors' insurance 20,000Special rules for vessel and aircraft leasing 1,000NASCAR track owners subsidy 100Special expensing rules for independent film makers 336Tax credit for railway track maintenance 501Corporate deduction for attorney fees 32714 other corporate tax breaks from the American Jobs Creation Act* 5,730Subtotal $174,994

*Including incentives for fish tackle boxes, archery products, dog/horse track owners, sonar devices, shipbuilders, cruise ship industry, oil recovery, distilled spirits, wine, and beer.

Paying for Family Friendly Tax Reform (In Millions)

HOME MORTGAGE DEDUCTION FOR ALL 924,000

OffsetsExisting home mortgage deduction(Available to itemizers, only) 868,000Special interest incentives to be eliminatedSpecial breaks for large credit unions 15,200Special rules for the timber industry 5,000Corporate jet loophole 3,000Lenient tax shelters standards* 8,800Corporate SUV and luxury car loophole 1,100Loophole for private activity bonds to build sports facilities** 1,000Special rules for extractive industries 19,000Five estate and trust loopholes*** 7,100Subtotal $928,200

*”Options to Improve Tax Compliance and Reform Tax Expenditures”, Joint Committee on Taxation, January, 2005**Ibid***Ibid

Paying for Family Friendly Tax Reform (In Millions)

FAMILY TAX CREDIT 1,123,000

OffsetsExisting child and family credits to be consolidatedEarned Income Tax Credit 390,000Child Credit 462,000Dependent Care Credit 21,000Savings through tax simplificationInstitute third-party reporting of capital gains* 250,000Subtotal $1,123,000

*Dodge and Soled, “Inflated Tax Basis and the Quarter-Trillion Revenue Question” January, 2005

Paying for Family Friendly Tax Reform(In Millions)

UNIVERSAL PENSION $309,000

OffsetsSimplification of existing IRAsConsolidate 16 tax-favored retirement account 262,000Make $3,000 contribution limit permanent* 4,200Special interest tax breaks to be eliminatedCEO pay loophole 2,000Bermuda loophole 5,000Eight provisions related to pensions and employee benefits ** 15,800Subtotal $309,000

FAMILY FRIENDLY TAX REFORM TOTAL $2,535,194

*”Family Friendly Tax Reform”, Progressive Policy Institute, April, 2005**”Options to Improve Tax Compliance and Reform Tax Expenditures”, Joint Committee on Taxation, January, 2005