By Paula Cruickshank, CCH Washington Staff Writer
Lost in the growing debate over how to reform Social Security is a very related topic: national tax simplification. For decades, general tax revenues have been artificially supported by the surplus receipts of Social Security taxes, because the retirement program is "on budget." The government just writes Social Security an IOU and says it will pay it back later with some interest.
That would have worked out fine had the population demographics continued. But the generations following the Baby Boom generation are smaller, so there are fewer and fewer workers to support more and more retirees. Therefore, the situation where Social Security surpluses for so long had masked the true fiscal budget picture was becoming untenable. Not only did Social Security need reform, but possibly a more holistic approach to government revenue collection was in order.
For this reason and others, George W. Bush's administration, and several members of Congress, have called for a discussion on overall tax simplification, as well as Social Security reform.
The Council of Economic Advisers (CEA) explored several tax reform options in its annual report to President Bush, depicting its review as a "starting point" in the public debate over making the current tax system simpler, fairer and conducive to economic growth. CEA chairman N. Gregory Mankiw, at a February 17, 2005, press briefing on the economic report, emphasized that the president has not endorsed any specific approach to reform nor does the economic report favor any particular proposal. However, the CEA makes a particularly strong case for reforming the alternative minimum tax as part of any tax reform endeavor.
Mankiw advised that tax reform is "almost a necessity" given the impact of the alternative minimum tax alone on middle-income earners if the AMT is not adjusted for inflation. Without reform, the number of taxpayers paying the AMT is expected to increase dramatically from 3 million in 2004 to 38 million in 2010, and "most of the newly-affected taxpayers will not be those with the highest incomes," the CEA report notes. More than half of all taxpayers earning between $75,000 and $100,000 annually in 2003 and 94 percent of married taxpayers with two children in that income range will be subject to the AMT by 2010, according to the CEA report.
Alternatives for AMT reform include repeal or limiting its effect to high-income taxpayers by increasing exemption levels and lowering AMT tax rates. The CEA warns that significant changes to the AMT would be costly, noting that the ten-year cost of complete repeal would be nearly $1 trillion. Given that the president has directed any overall tax reform measures be revenue-neutral, Mankiw was asked if the administration is confident it could find $1 trillion in tax system changes to offset the cost of eliminating the AMT. Mankiw responded that the cost of AMT reform depends on how the administration decides to address the problem.
The CEA also examined several forms of consumption tax without endorsing any particular approach. Consumption taxes include the retail sales tax, the value added tax, the flat tax and the consumed income tax. Under a consumed income tax, taxpayers first compute income as they do under the current system, but then are allowed an unlimited deduction for net saving during the year.
The report also noted that reforming the existing system was an option. Lowering rates and broadening the base "could be useful in guiding reform within the current system," according to the CEA report.
The CEA report cited several prime candidates for tax simplification. They include the capital gains rates affecting certain types of gains, taxes on dependent children with small amounts of investment income, and provisions that phase out certain tax benefits at higher income levels.
President Bush, in the accompanying economic message to Congress, said that the U.S. is "enjoying a robust economic expansion." Bush attributed the strong U.S. economy to the administration's pro-growth policies and the "strong efforts of American workers and entrepreneurs." The administration expects real GDP to grow 3.5 percent in 2005, "driven by continued gains in consumer spending, investment growth, and stronger net exports," and it projects an annual average growth rate of 3.3 percent between 2004 and 2008. The CEA forecasts a decline in the unemployment rate from 5.5 percent in 2004 to 5.1 percent by the end of 2006.
- Related items:
- Debate Continues Over Social Security Reform Issues
- Congress's Legislative Agenda Takes Shape
- New Tax Laws Bring Year-End Planning Opportunities
- FICA Tax Threshold, Social Security Benefits Will Moderately Increase
- Congress Approves New Tax Cuts Geared Toward Businesses and Individuals
- Congress Extends Individual and Business Tax Cuts; Adds New Tax Relief
- Congress Moves To Make Some Tax Cuts Permanent
- Prepare Now for Next Year's Tax Season
Added to the news on February 24, 2005.
|
