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Annette
Nellen

Questions about tax reform for the 2012 presidential candidates

Now that we are in the midst of the presidential debates, what questions should we ask of the candidates to gain a better understanding of their tax reform plans?

October 11, 2012

By Annette Nellen, Esq., CPA

President Barack Obama and former Gov. Mitt Romney have provided mostly generalities regarding how they would change the U.S. tax system and why they would make changes. Although Obama has more details due to his required budget proposals, questions can still be asked to gain a better understanding of his broader tax reform plans.

This article provides a brief overview of the candidates’ key tax reform proposals. Then sets of questions are offered to shed more light on the details needed to truly evaluate their plans. Perhaps the candidates might also find the questions useful in refining and shaping their ideas into more specific and comprehensive plans for a reformed federal tax system.

Obama

In September 2011, Obama released Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction, which included five principles of tax reform (page 46).

  1. Lower the tax rates for both individuals and corporations with fewer brackets.
  2. Eliminate “inefficient and unfair tax breaks.”
  3. Reduce the deficit by $1.5 trillion over the next 10 years. This principle includes allowing tax cuts to expire for high income individuals (those with over $200,000 of income or $250,000 if married filing jointly).
  4. Increase jobs and economic growth by increasing incentives to “work and invest” in the United States.
  5. Implement the “Buffett rule” to ensure that individuals with over $1 million of income do not have a lower effective rate than those with less income.

Obama's FY2013 “Greenbook” has some specifics on his tax proposals. For example, for upper-income taxpayers, he would let the 2001/2003 tax cuts expire and reinstate the estate and gift taxes and exemptions to  2009 levels. He would also cap the tax benefit of itemized deductions and certain exclusions of upper-income individuals at 28%.

The President's Framework for Business Tax Reform released in February 2012 includes various business reforms, including lowering the corporate rate to 28%. It would be lowered to 25% for manufacturers by increasing the Sec. 199 benefit.

Romney

Romney campaign materials lay out the key parts of his individual and corporate tax reforms. He also calls for repeal of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, which would eliminate various taxes, such as the Sec. 1411 3.8% Medicare tax on net investment income. Romney's individual reforms include:

  • Maintain the 2012 tax rates and further reduce marginal rates by 20%.
  • Maintain the 2012 rates on investment income, but eliminate taxes on interest, dividends, and capital gains for individuals with adjusted gross income under $200,000.
  • Repeal the estate tax.
  • Repeal the individual alternative minimum tax (AMT).

Romney's corporate tax reforms include:

  • Reduce the corporate rate to 25%.
  • Improve the research tax credit and make it permanent.
  • Move from a worldwide system, which taxes both U.S. individuals and businesses on all their income no matter where it is earned, to a territorial system, which would impose tax only on income earned in the United States.
  • Repeal the corporate AMT.

Questions for candidates

Budget

  • Are the reforms intended to be revenue neutral? Over what time period?
  • Do you have the projections on the revenue effects of your proposals?
  • Will the reforms help to reduce the national debt?

Tax policy

  • How do you define a simple, equitable, neutral, and transparent tax system? How would you enable the tax system to meet these principles? How would you balance the need for equity with the complexities of phaseouts and the AMT that help achieve equity (what other mechanisms might you employ, if any)?
  • Should accountability measures be used for tax incentives? If no, why? If yes, how should they be designed?
  • How should different types of business entities and their owners be taxed? Does the size of the entity matter?
  • Should a territorial system be used?  If yes, what approach would be used to deter shifting income to tax havens?
  • What process would you use, if any, to evaluate the numerous temporary provisions to determine which should expire and which should be made permanent?
  • Should a consumption tax be added?
  • Does the tax system and its administration need to be modernized? If yes, why and how would it be accomplished?
  • What other federal taxes should be reformed besides the income tax? How?
  • How will you ensure that a reformed system does not work in opposition to U.S. economic, societal, and environmental goals? How would you articulate those goals?

Individuals

  • How will your reforms affect income tax and total federal tax liabilities of individuals in each income quintile?
  • What tax preferences will be reduced or eliminated to help pay for lower tax rates? What principles guide your decisions on identifying which preferences should be on the elimination list? How would you respond to taxpayers and legislators who support keeping preferences you seek to cut or reduce?
  • What is your view on how income from labor and capital should be taxed? What economic principles support your view?
  • If estate and gift taxes are eliminated, will all gains at death be subject to income tax?

Corporations

  • How would you achieve a revenue neutral 25% or 28% corporate tax rate?
    • Would base broadening affect all businesses or only C corporations?
    • Would you replace modified accelerated cost recovery system (MACRS) depreciation with the slower alternative depreciation system (ADS)?
    • Would you eliminate expensing of research and development costs under Sec. 174?
    • Would a higher capital gains rate for individuals be used as an offset?

Process

    • What is your time frame for tax reform?
    • How would you work with both parties in Congress to make reform happen?
    • Would you create a special commission? What role would Treasury play?
    • Who should be involved in the process?
    • Should changes be transitioned in? If yes, how?
    • What is your assessment plan to determine if reform met the intended goals?

State tax considerations

    • How will you address state concerns about federal tax reform?
    • What is your view on the “Main Street Fairness” sales tax issue? Which of the proposals of the 112th Congress (H.R. 2701, H.R. 3179, S. 1832), if any, do you support?
    • Should Public Law 86-272 on income tax nexus be updated, especially in light of the growth of internet sales? If yes, how?
    • What are your views on proposals to limit state taxing authority (e.g., the Internet Tax Freedom Act, and H.R. 1860: Digital Goods and Services Tax Fairness Act)?

Resources

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Annette Nellen, Esq., CPA, is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the AICPA, ABA, and California State Bar. She chairs the AICPA's Individual Income Taxation Technical Resource Panel. She has several reports on tax policy and reform and a blog. She will be a speaker at the AICPA National Tax Conference, which will be held on Nov. 6 and 8 in Washington, D.C.