To print article, click Print on your browser's File menu. Go back   Get market news by e-mail See if refinancing works Personal finance bookshelf Letters from MSN Money readers Find It! Article Index Fast Answers Tools Index Site map Recent articles by Jeff Schnepper: • Even overseas, you can't escape the IRS, 6/7/2005 • Ground your retirement fund with real estate, 4/20/2005 • It's April 17. Do you know where your taxes are?, 4/14/2005 More...		The Basics 7 big tax changes I'd really like to see A presidential panel is due to report later this year on how it would reform our tax laws. Here's my wish list, starting with an April 15 election day.  By Jeff Schnepper As we prepare to celebrate the 229th anniversary of our nation's birth, it's time to get ready to talk tax reform. Congress is going to talk up tax reform after President Bushs nine-member Advisory Panel on Federal Tax Reform comes up with its recommendations on reforming the U.S. Tax Code. Originally scheduled for the end of July, the deadline for the report has been extended by two months. The commission has been busy for some time, going around the country taking testimony. I have not been asked to testify. I do, however, have my own thoughts about reform, and would love to know what you think. Heres what I expect to happen, and seven things I would love to see. What I expect is a whole lot of noise with little political chance for long-term passage. Congress will talk reform to death over the summer and early fall -- and then hide until after the November elections. Serious changes and meaningful negotiation wont happen until 2006 at the earliest, and we won't be dealing with the changes until we file tax returns in 2007. Looking for a loan? Check out MSN Money's Loan Center What to expect from Congress Look for a proposal to flatten out our rate structure, with tax brackets being eliminated. Congress tried this in 1986 and then spent the next two decades reversing the simplicity. Remember, weve had over 14,000 changes to the Tax Code since 1986. Expect lots of changes in the investment area, including the possibility (better make that the fantasy) of eliminating the tax on capital gains. Investment income, especially dividends and interest, will be subject to a lower rate than earned income. Qualified dividends already have a 15% maximum tax. This is all part of President Bushs goal to stimulate investment and savings. Hell try to do this by shifting the tax burden to earned income and consumption. President Bush also wants to completely end the estate tax. Read my lips -- Not gonna happen. Well probably end up with a lifetime exclusion of about $5 million. Thatll wipe out the tax for all but the super wealthy and defuse a lot of heat. Between husband and wife, that means no tax unless the estate is worth more than $10 million. New incentives for long-term savings. I expect increased contribution limits for IRAs, 401(k)s and profit-sharing plans. Private retirement accounts will be suggested. Think ownership society, and youll get the direction and agenda of the report to come. A low-rate consumption tax will be suggested to pay for the above breaks. It will most likely be a national sales tax rather than the more complex value-added tax. I expect a 5% to 10% rate. I also expect the Democrats to go ballistic over the regressive impact of the tax on the poor. What I want to see As you have heard me say before, our tax system is broken. The U.S. Tax Code is overly complex and burdensome. It gets amended so often (38 major tax changes in the last 41 years) that it hobbles the competitiveness of small businesses nationwide. You cant plan long-term if the rules keep changing. Its also hard to get respect for compliance when most people dont understand the rules of the game. Related news and commentary on MSN Money • Tax planning is a year-round game; start now • Even overseas, you can't escape the IRS • The IRS can help you cope with a disability • Owe money to the IRS? Charge it • Dont get bitten by the Awfully Mean Tax • Can you turn to the IRS for tax help? It would really help to have a tax code thats less than 9 million words and rising. Compare that with the Bible, with 773,000 words, the Declaration of Independence with 1,300, and Lincolns Gettysburg Address, the document that defined the American nation, with only 272. National Taxpayer Advocate Nina Olson, and Eric Toder, former deputy assistant secretary for Tax Analysis at the Treasury Department, recently reported IRS statistics from 2002 showing individual taxpayers spending $20.8 billion in actual costs and 3.5 billion hours to file their tax returns. Heres my wish list for tax reform: Hold federal elections on April 15 instead of the first Tuesday of November. Admittedly, it's not a tax law, but if we vote on Tax Day, that will surely get the government's attention! I made this proposal in 1986 when I was invited to the White House to consult on the proposed 1986 Reform Act. Maybe thats why I wasnt invited to testify before this panel. Make Congress do its own tax returns. And theyll have to use a pen -- no computers allowed. That should get rid of some of the complexity. Dump the Alternative Minimum Tax (AMT). Republicans and Democrats agree that the tax, designed to ensure all taxpayers pay some tax, is way out of hand. They've spent the last five years or so talking about how to fix it. Its almost certainly to be on the agenda of proposals that will come out of the Advisory Panels report. But Im not optimistic Congress will do much about the AMT. Just extending the current increase in the AMT exemption would cost $385 billion over 10 years, and 7 million taxpayers would still be subject to the AMT hit in 2010. If it were repealed altogether, it would cost the government $611 billion over 10 years. If the Bush tax cuts of 2001 and 2003 are extended, the loss of revenue due to the AMT would hit $954 billion, according to the Center on Budget and Policy Priorities. With our current deficit, thats a lot of revenue to make up. Raise the personal income-tax exemption. Then, tax income above that level at 25%. I would boost the personal exemption to $50,000 for singles and $100,000 for couples. This great idea from Michael Graetz, a Yale University tax expert, would eliminate 100 million tax returns. Institute a value-added tax (VAT). Put in a rate of 13% to 14% to replace any lost revenue. If that's too complicated, then up the 25% marginal rate to 40%. Before you start screaming, remember that on a joint return, under this proposal, the first $100,000 on a joint return would be federal tax free. Consolidate and simplify educational incentives. Weve got the Hope Credit, the Lifetime Learning Credit, the deduction for Qualified Higher Education expenses, Section 529 Plans and Coverdell Educational Savings Accounts -- all with different rules and qualifications. Reform and simplify the rules on tax-favored retirement savings. We have traditional IRAs, Roth IRAs, SEP-IRAs, SIMPLE IRAs (which are anything but), 401(k)s, 403(b)s, profit-sharing plans, money purchase plans, etc -- all with different qualifications and limitations. Then weve got a whole industry of people to tell you how and when you can and/or have to take out your own money. Give me a break. Those are my top seven on my tax reform wish list. Whats on yours? Heres an idea. How about you e-mail your top tax reform ideas to us and well start a series. What do you think the panel should come out with -- from both a practitioners and a taxpayers point of view? Maybe we can get somebody to pay attention and make some substantial positive changes. You can offer your suggestions in our Tax Corner community. Just look for "What tax reforms would you like to see?" Or click on the "e-mail us your comments" link at the bottom of this page to send your thoughts. I look forward to hearing your ideas. More Resources ·  E-mail us your comments on this article ·  Post on the Your Money message board ·  Get a daily dose of market news Search MSN Money     tips   advertisement Sponsored Links
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