On August 27, 2010, the President’s Economic Recovery Advisory Board (PERAB) adopted and submitted its Tax Reform Subcommittee Report to President Obama.
PERAB, headed by former Federal Reserve Bank Chairman Paul Volcker, was established by President Obama in early 2009 to provide independent and nonpartisan information, analysis and advice for economic recovery and for increasing the competitiveness of the U.S. economy.
The 116-page Tax Reform Subcommittee Report contains options for changes in the U.S. tax system designed to achieve three broad goals:
1) Simplifying the tax system
2) Improving taxpayer compliance with existing tax laws, and
3) Reforming the corporate tax system
The report notes that the Board was asked to consider various options for achieving the above-noted goals, but it was clearly instructed by the Obama Administration to exclude any options that would increase taxes for families with incomes less than $250,000 a year.
Some of the more significant recommendations contained in the PERAB report include:
• Combining or consolidating the child tax credit, the earned income tax credit and the child dependent exemption
• Simplifying and consolidating tax incentives for education, such as the Lifetime Learning Credit and the American Opportunity Tax Credit
• Consolidating retirement account rules and harmonizing statutory requirement
• Expanding automatic enrollment in retirement savings accounts
• Simplifying taxation of Social Security benefits
• Harmonize the 25% (depreciation recapture) and 28% (collectibles) capital gains rates
• Simplify capital gains taxes on mutual funds with a single cost basis method
• Simplify the small business stock gain exclusion rules
• Simplify the capital gains tax rate structure
• Limit or repeal Section 1031 Like-Kind Exchanges
• Index the exclusion for capital gains on principal residences for inflation
Corporate Tax Rates
• Reduce the current statutory corporate rate from 35%
• Increase incentives for new investment/direct expensing
• Provide more level treatment of debt and equity financing (limit deductibility of interest expense)
• Eliminate or reduce accelerated depreciation
Compliance Options (Tax Gap)
• Increase information reporting and at source withholding
• Require banks to report small business bank account information to IRS
• Clarify the definition of independent contractor for payroll tax purposes
The PERAB report will now be submitted to the bipartisan National Commission on Fiscal Responsibility and Reform to be considered in its recommendation for measures to address the national deficit. The Commission’s report is due December 1, 2010. In addition, Chairman Volcker indicated that he hopes that the PERAB report will serve as a useful project as Congress and the Obama Administration consider their tax reform agendas.
We will see if tax reform gets any attention before the November mid-term elections, after Congress returns from its summer recess in mid-September.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.