Who’s on the Board
The board is largely non-political. Besides Paul Volcker, the Board has as its members a former SEC chairman, a venture capitalist, a representative from AFL-CIO, corporate executives, endowment fund manager David Swensen, university professors, and Obama’s economic advisor Austan Goolsbee.
Scope of the Report
The board was asked to consider ideas that pertain to tax simplification, closing loopholes, and corporate tax reform. The board was specifically asked to exclude ideas that would raise taxes on families with income less than $250,000. So raising taxes broadly to reduce the deficit is off the table. That’s the job of a different commission, National Commission on Fiscal Responsibility and Reform, whose members are mostly elected House Representatives and Senators.
Because the Volcker advisory board was asked not to consider any grand scheme tax reform such as flat tax or introducing a VAT, the ideas are only within the framework of the current tax system. I read the entire report (95 pages). I’m in favor of most of the ideas. I list some of the ideas on individual taxation with my comments.
1. Consolidate child related benefits (pp. 8-9)
The child tax credit, dependent exemptions, EITC, and dependent care credit are too complex. Bundling them is a good idea.
2. Consolidate education related benefits (pp. 10-15)
There are 18 education related tax benefits. Who understands them all? Give one benefit and be done with it.
3. Simplify kiddie tax (pp. 15-16)
If a child earns income from wages, I’m in favor of giving the child a larger standard deduction and not withholding taxes from wages. Investment income, however, should be taxed at the parents’ rate from the first dollar. There’s no reason to create complexity with three tiers: first $950 free, next $950 at child’s rate, anything over at parents’ rate.
4. Consolidate retirement accounts (pp. 24-28)
Yes! See previous post Retirement Plans Galore: 401(a), 401(k), 403(b), 457, SEP, SIMPLE.
5. Make everyone eligible for a deductible IRA (p. 28)
Right now whether one can take a deduction for a contribution to an IRA depends on one’s income and coverage by a retirement plan at work. The proposal makes everyone eligible for a deductible IRA but the combined limit for both IRA and employer sponsored retirement plan will stay under the $16,500 limit, meanwhile the IRA itself still has the $5,000 limit.
The proposal didn’t go far enough. It should give a combined limit to all plans and IRAs and that’s it. That’ll be simple, elegant, and it frees people from bad plans at work or not having a plan at all.
6. Consolidate non-retirement savings plans (p. 29)
Here we are talking about FSA, HSA, MSA, 529, and Coverdell. One account for health and another for college seems reasonable.
7. Simplify Social Security taxation (pp. 34-36)
The Board proposed small simplification on taxing Social Security benefits: use two tiers instead of three; not count Social Security benefits in MAGI. It’s too timid. Income is income. Just make Social Security fully taxable.
8. Indexing principal residence exclusion for capital gains (p. 41)
Bad proposal! The exclusion should be eliminated. Treat capital gains the same whether it’s from securities or real estate.
9. A pre-filled return from the IRS for taxpayers with simple returns (p. 43)
It can serve as a good starting point for many. Verify, update, and send. I won’t use it until all the tax complexities are eliminated but it’ll probably help some.
10. Limit itemized deductions and give a larger standard deduction (pp. 44-46)
The proposal only limits itemized deductions. It should eliminate them. It’s already done this way in AMT. It’s much cleaner. The majority of itemized deductions can be eliminated in exchange for a larger standard deduction.
11. Eliminate the AMT (p. 50)
When most of the itemized deductions are eliminated, we can also eliminate the AMT. Calculating taxes twice is insane.
Will these ideas be implemented? I’m not holding my breath. One can always dream, right?