Taxpayer's Tab: Legislative Spotlight: Tax Reform

Welcome to The Taxpayer's Tab -- the weekly newsletter for up-to-the-minute research from the National Taxpayers Union Foundation's BillTally Project. For more information, check out NTUF's BillTally Project and our partner, WashingtonWatch.com!

Legislative Spotlight: Tax Reform

Within a week of the celebration of the birth of our nation, forged on a tax revolt, the Supreme Court affirmatively decided that the individual mandate, the key component of the President's health care overhaul, is constitutional under Congress's taxing authority. Though the Medicaid expansion provisions were struck, the rest of the Affordable Care Act contains 20 new or increased taxes. Some of these have already gone into effect, while the remainder, including the individual mandate tax on individuals without qualifying health insurance, will kick in over the next few years. Taxpayers also face additional pending tax hikes as the Bush tax cuts are set to terminate at the end of this year.

Lawmakers have a difficult challenge regarding tax policy: they must address the issue of how to fairly assess taxes for current government expenses and they must figure out how to achieve long-term fiscal solvency while also promoting economic growth. While the heated debate over the appropriate level of taxation rages on, economists spanning the ideological spectrum (from the Tax Policy Center to the Heritage Foundation) agree that the tax system needs to be simplified. Tax Code complexity increases the compliance burden on individuals and increases administrative costs to the government. To address this pressing problem, three pieces of legislation -- scored by the National Taxpayers Union Foundation's BillTally project -- have been introduced in the 112th Congress that would fundamentally change our tax system.

Photo Credit: The Christian Science Monitor

1% Transaction Tax

The Bill: H.R. 1125, Debt Free America Act

Annualized Savings: "No Cost" -- Revenue-based

Number of Cosponsors: None

Congressman Chaka Fattah (D-PA) has introduced a bill to repeal the progressive income tax and institute a one percent tax on any check, cash, credit card, transfer of stock, bond, or other financial instrument transaction. Bank account transfers and bank deposits would be exempt from the assessment. By 2021, the individual income tax, all personal tax credits, and the Alternative Minimum Tax (AMT) would be eliminated. While both the transaction and personal income taxes are in effect, individuals making under $100,000 and households making under $250,000 would receive a one percent credit to offset the tax.

H.R. 1125 does not call for an increase or decrease in federal spending. However, considering the number of taxable transactions that occur on a yearly basis and the possible costs associated with monitoring those transactions, it is unknown whether enacting the bill would result in increased administrative costs to the federal government.

To learn more or discuss this bill visit WashingtonWatch.com.

Consumption Tax

The Bill: H.R. 25/S. 13, Fair Tax Act of 2011

Annualized Savings: $17.5 billion ($87.6 billion over five years)

Number of Cosponsors: 69 Congressmen and 8 Senators

Congressman Rob Woodall (R-GA) and Senator Saxby Chambliss (R-GA) propose to replace the current income tax system with a national retail consumption tax. At every point of sale for all new products and services, a 23 percent tax (inclusive of the sales price) would be charged. Used goods could be purchased tax-free. All taxpayers would receive a monthly "prebate" so that no one would pay taxes for consumption up to the poverty line. The Fair Tax Act would also eliminate all other types of federal income-based taxes including withholding, estate, gift, personal, and capital gains taxes. H.R. 25 and S. 13 would eventually eliminate the Internal Revenue Service (IRS) and replace it with a smaller agency that would oversee the prebate.

NTUF estimates that instituting the Fair Tax would save the federal government $87.6 billion over its first five years. The bulk of the spending cuts would result the elimination of refundable credits -- special tax credits that result in budgetary outlays because they are designed to target individuals with little or no income tax liability. While additional savings would be achieved by phasing-out the IRS, the bill would also incur costs related to the new, smaller agency that would administer the prebates.

To learn more or discuss this bill visit WashingtonWatch.com.

Flat Tax

The Bill: S. 820, Simplified, Manageable, and Responsible Tax (SMART) Act

Annualized Savings: $77.2 billion (first-year savings)

Number of Cosponsors: None

Senator Richard Shelby (R-AL) proposes to replace the 6-bracket progressive income tax with a single 17 percent income tax. Like the Fair Tax, this plan would eliminate all income tax credits, the AMT, and the estate, gift, and generation-skipping transfer taxes. A standard exemption would also be established, similar to the current system, which would allow individuals making under $13,410 and households making under $17,120 to not pay an income tax.

NTUF determined that if S. 820 was enacted last year upon introduction, it would have saved $77.2 billion through the repeal of refundable tax credits. You can check out a table of the refundable tax credits that would be repealed under the SMART Act here. The most recent budget estimates that outlays from refundable credits will reach nearly $83 billion in FY 2012. It is unknown to what extent that changing to a flat income tax would alter the enforcement and processing costs of the IRS.

To learn more or discuss this bill visit WashingtonWatch.com.

Even without the new taxes and regulations in the Affordable Care Act, our tax system presents a mounting problem impeding economic growth. At over 72,000 pages, the Code is riddled with loopholes and subsidies that distort government policies and lashes down private sector innovation. At the behest of their constituents, legislators are now at least discussing tax reform. For more information on these and other proposals already introduced in the 112th Congress, check out a report released by the Congressional Research Service here.

Missed an Issue?

Issue 15 - June 27
Health Care Reform Alternatives

Issue 14 - June 20
Veterans' Compensation Cost-of-Living Adjustment Act

Issue 13 - June 15
Prepare All Kids Act

Issue 12 - June 8
Student Success Act

Issue 11 - May 31
Tariff & Duties Suspension Spotlight Edition