Tax Policy Advice for President Obama

Via TaxProf Blog tax advice for President Obama from taxs professors. Most of the advice is pretty sound. No one suggests a tax increase:

Beau Baez (Charlotte): Enact legislation recognizing the Streamlined Sales Tax Governing Board as a state compact, and eliminate the Quill physical presence requirement for states that are members in good standing in the new state compact.

Bryan Camp (Texas Tech):

1. Enable the IRS to administratively collect non-rebate erroneous refunds as I proposed in my article, The Mysteries of Erroneous Refunds. That article provides a specific legislative proposal to address a very real gap in tax collection policy. Aside from being an no-brainer as a matter of policy, heck, it's a revenue raiser!
2. Repeal judicial review of routine administrative collection decisions. Section 7433 already allows taxpayers to sue for IRS violations of collection statutes and should be retained. However, the judicial review allowed by section 6320 and 6330 for routine collection decisions has proven to be of no benefit to taxpayers, as my Indiana Law Review study of almost 1,000 judicial opinions between 2000 and 2006 demonstrates.

Paul Caron (Cincinnati): Remove estate planning uncertainty by freezing the estate tax exemption ($3.5 million) and rates (45%) at their 2009 levels.

Bridget Crawford (Pace):

1. Allow same-sex couples to file joint income tax returns (and to gift split, make tax-free wealth transfers, etc. ).
2. Create a free, reliable and sophisticated on-line filing system that can accept all types of tax returns (estate, gift, etc.) from taxpayers of all levels of wealth, and reduce the statute of limitations on garden-variety audits from 3 years to 2 years.
3. Change the exclusion under Section 121 to an amount equal to the median home value in the metropolitan area (or another geographically-defined region) where the the principal residence is located.

Joseph Dodge (Florida State): Do not do any more damage to the Code.

Calvin Johnson (Texas): These are the 27 best ways to find revenue, so far.

Benjamin Leff (Harvard): General suggestion: really make a break with the recent past by repealing special targeted tax breaks in favor of increasing the personal exemption (in other words, take out special privileges in favor of lower taxes for everyone). Specific proposals:

1. Repeal favorable rate for capital gains and dividends. It adds unnecessary complication and is unjustified.
2. Repeal section 102 and tax gifts as income. (or, repeal section 102 except for a small annual exemption, say $4,000 or $5,000, medical expenses and educational expenses).
3. Don't enact stupid so-called "stimulus" in the form of accelerated depreciation or other similar short-term complicated tax benefits.

Francine Lipman (Chapman): I believe President Obama should and will apply his commitments to transparency, education, public service and shared responsibility for all members of society to the federal income tax system. The 2008 election broadcast loudly and clearly that most Americans do not understand how our income tax system works and are angry/frustrated with its perceived negative impact on their lives. The federal income tax system should be less complicated, more transparent and a vibrant part of a participatory government. While the federal tax system has proven to be a relatively efficient delivery system for benefits for the working poor the system could and should be improved. Indeed the annual filing/compliance mechanisms for individual and business tax reporting and collection are dated and very costly. Technology, as well as other resources, should be better allocated to reduce compliance and collection costs and better target tax deficiences and close the tax gap. As part of my commitment to public service and tax education, I am very much looking forward to serving low income taxpayers (sadly including members of the armed forces, hence my work-in-process article "Taxing Private Ryan") in the next few months.

Jim Maule (Villanova): I'd repeal § 465 ... it was a feeble attempt to deal with the issues § 469 addresses. As I noted in my posts on Monday, and will note on Wednesday, time to ditch bonus depreciation, first-year expensing, and depreciation of real estate. I'd also combine all the zones and disaster area provisions into one coherent provision. Ditto the provisions dealing with education, and ditto the provisions dealing with the tax consequences of having, keeping, adopting, and supporting children.

The key is to simplify. When things are complicated, people are less likely to be trusting. Understandably so. Less trust, less confidence. Less confidence, less economic robustness.

Restore the economy by restoring confidence. Restore confidence by restoring trust. Restore trust by eliminating and minimizing the tools and opportunities for people to abuse trust or to have their trust broken. No more hiding by the bad guys behind smoke and mirrors. Subchapter K is in front of the line when roll call is taken for smoke and mirror provisions.

Rob Nassau (Syracuse): Eliminate the tax-rate preference for long-term capital gain. (This was good enough for Reagan.) To me, this difference in tax rates makes no economic sense (money is money, and my grocer doesn't ask whether the $2.79 I gave him for a gallon of milk comes from salary or capital gain); plus, it contributes to a lot of the complexity and uncertainty in the Code (see, e.g., the carried interest debate, which would go away), not to mention the "shenanigans" that requires enactment of provisions such as Section 1258 ("conversion transactions"). If we're concerned that eliminating the tax-rate preference will "dry up investment," then expand Section 1202, and allow a tax-rate advantage for new capital infusions only.

David Pratt (Albany):

1. Repeal the unlimited exclusion for the cost of employer-provided benefits, including health benefits. There is abundant evidence that the exclusion overwhelmingly benefits upper income taxpayers.
2. Require a review of experience under the current version of section 121 and consider changes. For example, the once-every-two-years rule is way too liberal and the dollar maximum has very different significance in different markets.
3. Repeal the like kind exchange exclusion under section 1031.
4. Repeal or cap the exclusion for life insurance proceeds and the exclusion of the inside buildup.
5. Repeal or cap the exclusion for personal physical injury damages.

Walter Schwidetzky (Baltimore): Repeal Subchapter S (see Integrating Subchapters K and S: Just Do It, 62 Tax Law. ___ (2008)), and repeal § 469.

Dan Simmons (UC-Davis):

1. Repeal the home equity interest deduction. It has never been good policy to encourage people to incur debt secured by a personal residence for consumption and it now appears that home equity loans are a contributor to the mortgage lending crisis.
2. Repeal section 1031 (as Cal Johnson advocates). There is no sound policy reason for allowing deferred recognition of realized gain on real estate transactions as compared to stock investments. Indeed, I think the economy might be better served by allowing roll-over relief for sales of publicly traded securities where the proceeds are reinvested in publicly traded securities.
3. Eliminate the AMT problem by allowing state and local taxes as a deduction against AMTI. I would also provide some adjustment for personal exemptions.
4. If the administration wants to reduce the corporate tax rates, accompany the reduction with a reduction of the subsidy to investment in equipment and machinery that is provided by accelerated capital recovery by extending useful lives and limiting the rate of recovery to straight line, or at best 125 percent declining balance.

Bill Streng (Houston): To create a culture in the U.S. that paying appropriate taxes is a responsibility of every citizen; to finally destroy the Ronald Reagan thesis that taxes constitute a form of theft by the U.S. Government.

Michael Waggoner (Colorado): If you believe in limited government, in our federal system, in economic efficiency, in doing things that work regardless of ideology, President Obama, then please take inspiration from the 1986 Tax Reform Act and help to return to a broader tax base with lower rates.

Limited government should reject a tax system full of special tax favors and tax detriments that in effect say, "Do it my way or pay up to 35% (more in some cases)."

A federal system should reject having a major federal income tax angle to such traditionally state-law areas as family law, wills and trusts, personal injury litigation, criminal law. The federal tax angle in effect partially federalizes those areas.

Although there are certainly many circumstances when government intervention in the economy is necessary (to require disclosure, to protect safety and the environment, to take into account both positive and negative externalities, to avoid creation of a caste system of prior winners and losers in the market place persisting for entire lives and multiple generations, etc.), most tax incentives can fairly be described as diverting people from the sensible and useful to the marginal and less productive. Most tax incentives are inefficient.

Programs authorized by the Congress to operate with appropriated funds get far more scrutiny than do special tax provisions. One may doubt whether the special tax provisions (because given less scrutiny) succeed in the goals espoused for them. For example, the stimulus proposals include generous depreciation provisions, because it is hoped that these provisions will stimulate the economy by causing businesses to buy new equipment. The problem is that well-advised businesses buy equipment for business reasons, not for tax reasons. Thus most of the tax benefit goes for purchases that would be made in any event, and thus produces no benefit to the economy. To the extent these depreciation provisions succeed in causing new purchases, they may be changing the mix of labor and equipment that the business would otherwise use, the increase in equipment resulting in less need for labor, thus destroying jobs. Tax provisions that do not not work should be repealed, not proliferated.

The basic problem that you must face, President Obama, is that politics tends to reward the particular and not the general. Everyone in politics wants to tell a constituent group of the particular benefit for that group that politician has obtained, thus encouraging their support, their votes, their contributions. The general benefit of low rates on a broad base has no constituency and thus is harder to achieve. That benefit, however, tends to promote efficiency, and efficiency is the basis of prosperity, and peace and prosperity is a pretty good re-election platform.

I trust that you will succeed and that a few decades in the future we will be asking, "Is there any way that we could expand Mount Rushmore to include President Obama?"

Alan Westheimer (Houston):

1. Instead of bonus depreciation and increased fixed asset expensing, revive the Investment Tax Credit under a regime the same or similar to its structure when repealed in 1986. Consider restricting to assets made in the USA.
2. Remove the luxury car limits for depreciation on business autos manufactured in the USA. Let's go back to being able to depreciate vehicles over 3 years using DDB depreciation (for new ones) so you can write off 2/3 of the cost in the year of purchase. Let's also drop discrimination against vehicles not used 50% or more for business purposes. The rules should be the same regardless of the extent of business use.
3. Let's also drop the 50% limitation on meals and entertainment and go back to 100% deductibility for these expenses.