Family Friendly Tax Reform

Testimony of Paul Weinstein Jr. Chief Operating Office and Senior Fellow The Progressive Policy Institute Presidents Advisory Panel on Federal Tax Reform May 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 ONeill 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

Offsets Existing college benefits to be consolidated Hope Scholarship and Lifetime Learning Credit 54,000 Deduction for higher education expenses 24,000 Employer-provided education benefits 8,000 Qualified tuition savings accounts 6,000 Special interest incentives to be eliminated Corporate shelters for highly mobile foreign income 55,000 Corporate loophole for janitors' insurance 20,000 Special rules for vessel and aircraft leasing 1,000 NASCAR track owners subsidy 100 Special expensing rules for independent film makers 336 Tax credit for railway track maintenance 501 Corporate deduction for attorney fees 327 14 other corporate tax breaks from the American Jobs Creation Act* 5,730 Subtotal $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

Offsets Existing home mortgage deduction (Available to itemizers, only) Special interest incentives to be eliminated Special breaks for large credit unions Special rules for the timber industry Corporate jet loophole Lenient tax shelters standards* Corporate SUV and luxury car loophole Loophole for private activity bonds to build sports facilities** Special rules for extractive industries Five estate and trust loopholes*** Subtotal

924,000

868,000 15,200 5,000 3,000 8,800 1,100 1,000 19,000 7,100 $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

Offsets Existing child and family credits to be consolidated Earned Income Tax Credit 390,000 Child Credit 462,000 Dependent Care Credit 21,000 Savings through tax simplification Institute third-party reporting of capital gains* 250,000 Subtotal $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
Offsets Simplification of existing IRAs Consolidate 16 tax-favored retirement account Make $3,000 contribution limit permanent* Special interest tax breaks to be eliminated CEO pay loophole Bermuda loophole Eight provisions related to pensions and employee benefits ** Subtotal FAMILY FRIENDLY TAX REFORM TOTAL

$309,000

262,000 4,200 2,000 5,000 15,800 $309,000 $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