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Presidential Tax Reform Panel Recommendations

CNN/Money reported today that the Presidential Tax Reform Panel has recommended two plans [3] of reform for our complicated federal tax code (they met for the second and last time yesterday). The first is to simplify and modify the current federal tax code while the second adds a “progressive” consumption tax; both include the elimination of the much hated and now miss-targeting Alternative Minimum Tax. A few of the suggestions make great sense while others don’t but for the most part I think they’re worth discussing.

1. Reduce tax brackets to four (from six): 15%, 25%, 30%, 33% (currently: 10%, 15%, 25%, 28%, 33%, 35%) – Until the income levels are officially released, this doesn’t really mean much. I would hesitant to accept it though if it meant a greater tax burden fell on lower earners.

2. Elimination of the marriage penalty, state/local tax deductions – The marriage penalty (when you get married, you pay more in taxes because of the deduction levels of couples filing jointly versus two single filers added together are lower) is something that’s never made much sense and an artifact of the past when families didn’t have two wage earners. As for state/local tax deductions, removing them is a small price to pay for some of the other benefits that could possibly be pushed through.

3. Limit the home mortgage deduction, increase capital gains exclusion on home sales from $500k to $600k for couples – I don’t really like the first one and until hard numbers are out, it’s hard to know what they truly intend. With the hot market and higher home prices, limiting this deduction could be crippling especially if people bought homes relying on this deduction (hopefully they didn’t but there are many bad loans out there). The increase of capital gains exclusion only seems fair with rising prices, it would make more sense if it were a percentage gain instead of a flat number.

4. Reducing the number of tax-advantaged accounts – Simplification written all over this one, putting all accounts into three buckets of personal retirement accounts, work retirement accounts, and family accounts makes life easier.

5. Eliminating the Alternative Minimum Tax – Good, but it’ll cost the government around $1.2 trillion over 10 years and the money will have to come from somewhere. Read this for a little explanation of the AMT [4].

They stressed that this was only the start of the conversation and I believe it’s a good start. The panel won’t officially report until Nov. 1 and most believe recommendations won’t be given to Congress by the President before 2006, so it’ll be a little while before we see some action.