NCPA - National Center for Policy Analysis


November 28, 2005

The President's Advisory Panel on Federal Tax Reform recommended critical improvements to our tax system, according to Boston University economist and NCPA Senior Fellow Prof. Laurence J. Kotlikoff.

The list includes eliminating the Alternative Minimum Tax (AMT), limiting mortgage and health insurance tax subsidies, eliminating the deductibility of state and local taxes, rationalizing deductions, exemptions, tax credits and retirement account options, and reducing the taxation of saving. If these reforms are implemented with transition rules that don't give away the store, our tax system will be more efficient and, in many ways, more equitable.

  • The Panel's reforms would eliminate personal exemptions and itemized deductions, and the standard deduction, Child Tax Credit, Earned Income Tax Credit and marriage penalty. In their place, the Panel offers just two credits: a Family Credit and a Work Credit.
  • They would replace a welter of tax-exempt or deferred savings accounts with three similar plans -- Save at Work, Save for Retirement and Save for Family -- all with high contribution limits. Like Roth IRAs, there would be absolutely no taxes levied on any income they earn. Refundable tax credits would directly help poor people save.
  • All capital income, including interest, rent, capital gains and dividends, earned outside of retirement accounts would be taxed at 15 percent at the personal level.
  • Businesses would be able to immediately write off all new investment and their top marginal rate would fall from 38 percent to 30 percent -- or zero percent if all earnings are reinvested. The Panel also would eliminate the deductibility of business interest payments, eliminating the current bias toward debt financing.

Kotlikoff gives the Panel's recommendations a B+ because, even were they adopted, our tax system would remain complex, expensive to administer, highly inimical to working, and still rather inimical to saving.

Source: Laurence J. Kotlikoff, "Grading the President's Tax Reform Panel's Plan," Brief Analysis No. 538, November 28, 2005.

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