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Guest Article

(From the September 7, 2010 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

President's Advisory Board Releases Analysis on Tax Reform Options

The President's Economic Recovery Advisory Board, chaired by former Federal Reserve Chairman Paul Volcker, has released its analysis of various options to change the current Federal tax system to achieve the three-part goal defined by the President: simplification of the tax system, compliance improvement, and reformation of the corporate tax system.

Staying true to its narrow mission, the Board made no recommendations toward overarching tax reform and did not consider proposals for a value-added tax. Rather, the 130-page report addressed numerous specific options for achieving the identified goals while identifying the related advantages and disadvantages. The Board was instructed not to consider options that would raise taxes on families making less than $250,000.

In terms of simplification, six "option groups" were formulated.

Simplification for Families. These options include:
- Consolidating family credits (e.g., the earned income tax credit, child tax credit and child dependent exemption).
- Simplifying and consolidating tax incentives for education (e.g., Hope scholarship credit, lifetime learning credit, student loan interest deduction, employer-provided education assistance, tuition reduction, qualified tuition plans, traditional and Roth IRAs, Coverdale education savings account, etc.).
Simplifying Savings and Retirement Incentives. These options include:
- Consolidating retirement accounts and harmonizing statutory requirements (e.g., payroll deduction IRA, SIMPLE 401(k), Safe Harbor 401(k), traditional 401(k), 403(b), etc.).
- Integrating IRA and § 401(k)-type contribution limits and disallowing non-deductible contributions.
- Clarifying and improving saving incentives (e.g., making the saver's credit a matching contribution, expanding automatic enrollment in retirement savings plans).
- Simplifying the rules for employers sponsoring plans (e.g., simplifying the nondiscrimination requirements, eliminating cross-testing and Social Security integration).
- Simplifying disbursements from retirement plans (e.g., eliminating the age 70½ rule for individuals with retirement asset below a certain threshold).
Simplifying Capital Gains Tax. These options include:
- Harmonizing the rules and tax rates for long-term capital gains (e.g., harmonizing the 25 and 28 percent rates, simplifying capital gains tax on mutual funds).
- Simplifying the capital gains tax rate structure (e.g., converting the separate tax rates into a 50 percent exclusion, etc.).
- Limiting or repealing § 1031 like-kind exchanges.
- Indexing for inflation the capital gains exclusion on principal residences.
Simplifying Tax Filing. These options include:
- Establishing a simple return (e.g., providing a simple, pre-filled return to taxpayers who file relatively simple returns).
- Establishing a data retrieval system (e.g., allowing taxpayers to download their own tax information from the IRS).
- Raising the standard deduction and reducing the benefit of itemizing deductions.
Simplification for Small Businesses. These options include:
- Expanding simplified cash accounting to more businesses.
- Simplifying the home office deduction.
- Simplifying recordkeeping for cell phones, PDAs, etc.
The Alternative Minimum Tax. These options include:
- Eliminating the AMT.
- Modifying and simplifying the AMT.

In terms of improving compliance the Report identifies options to dedicate more resources to enforcement, to increase information reporting and source withholding, and to require small businesses (as a condition of being able to use cash accounting) to open separate business bank accounts whose receipts and expenditures will be reported directly to the IRS. Other options include clarifying the definition of an "independent contractor," harmonizing the employment tax rules for businesses and the self-employed, establishing a voluntary compliance program, examining multiple tax years during certain audits, and extending the holding period for the capital gains exclusion on primary residences.

With regard to reforming the corporate tax system the Report focuses on two "option groups."

Reducing marginal corporate tax rates. These options include:
- Reducing the statutory corporate rate (e.g., reducing each of the top two corporate tax bracket rates of 35 percent and 34 percent by one percentage point).
- Increasing incentives for new investments through direct expensing (e.g., allowing businesses to "expense" all or a portion of their new investment immediately rather than over time).
Broadening the corporate tax base. These options include:
- Providing more level treatment of debt and equity financing (e.g., limiting the deductibility of net interest - i.e., the excess of interest expense over interest income).
- Reviewing the boundary between corporate and non-corporate taxation (e.g., passthrough entities that have worn away the corporate income tax base such as partnerships, LLCs, S corporations, etc.).
- Eliminating or reducing tax expenditures (e.g., the domestic production deduction, accelerated depreciation, special ESOP rules, exemption of credit union income from tax, low-income housing credit).

The White House announcement characterized the Report as "an informative and important almanac of options for tax reform." The Report will be submitted to the bipartisan National Commission on Fiscal Responsibility and Reform, which is considering ways to address the nation's fiscal challenges.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.