Election Day/Patriots Day

The IRS has announced that two states--Maine and Massachusetts-- that hold Patriots Day on the third Monday in April have provided an extra day for those state taxpayers to file their federal income tax returns.  See IRB 2006-170. 

By law, filing and payment deadlines that fall on a Saturday, Sunday or legal holiday are timely satisfied if met on the next business day. Thus, since April 15 is a Sunday in 2007, taxpayers in most of the country will have until Monday, April 16, 2007, to file and pay. But Maine and Massachusetts observe the third Monday of April as Patriot’s Day, which in 2007, falls on April 16. Earlier this year, taxpayers were similarly affected when April 15 fell on Saturday and Patriot’s Day was the following Monday (April 17, 2006).

Maybe every state should pass a Patriots Day, so we all have the benefit of delayed filing.  And while we're at it, perhaps we should have a topic for national consideration on that day.  One topic  I propose that we need to think about as a country is the following--how can we achieve an equitable society in which everyone has a realistic opportunity to grow and develop their full human potential when those at the very top of the income and wealth scale have so much more than those in the middle and bottom?  To what extent can we or should we use the tax system to move towards a more equitable society by reducing the size of the gap between the ultra rich and the rest of us?  We all need to think more deeply about the important relationship of our tax system to our society's response to deeply embedded economic and social inequities.

In particular, as this election day has shuffled the government in fairly significant ways, it is appropriate to ask what kinds of tax issues ought or ought not to be on the table in the lame duck period of the Bush administration.  The conservative agenda pushed by the Administration during its first six years in office , with the significant aid of lobbyists like Grover Norquist and conservative think tanks like the Cato Institute and others, has included a series of tax ideas, a number of which have already been set in motion through the enormously complicated changes made to the tax system since the 2001 tax act.  Those include:  repeal of the billionaire's estate tax, replacement of social security with a "individual bears the risk of loss" private investment account that would put significant new money into the stock markets, reduction and perhaps eventual elimination of any income tax on capital gains, reduction and perhaps eventual elimination of any income tax on corporate dividends to shareholders, and incentivization of savings preferentially over work through larger and more general savings incentives such as Health Savings Accounts, retiree accounts, and other tax-exempt savings mechanisms.

I have questioned much of this agenda as tax preferences most useful to those at the top of the resource chain who own most of the financial and corporate assets.  We know that eliminating the estate tax, paid by only a very few estates at the very top of the wealth pyramid, has nothing to do with saving small family farmers or even small family businesses but is more about permitting gigantic estates to be passed to heirs without ever paying a fair share of tax on the rich capital gains accrued to the estate throughout the decedent's lifetime.  The economic analysis underlying the argument for nontaxation of returns from capital depends on a series of assumptions (e.g., uses other than consumption disregarded, lifetime leveling, risky and risk-free returns) that bear little relation to the actual patterns of wealth aggregation and wealth use.  The arguments are often based on a notion of "merit" and "responsibility" that seems but a thin veneer for discounting the difficulty of succeeding for those born into poverty or struggling in the middle class and the ease of finding support for those with significant assets.   

Other issues, of course, persist in our views of appropriate tax expenditures.  Dorothy Brown has recently written,  in Race and Class Matters in Tax Policy, about the need to re-color the Earned Income Tax Credit, for example, so that racist views of recipients do not lead to its elimination.  Yet Congress has passed (or allowed to continue) with hardly any discussion extravagant tax breaks for various big companies--including research & development credit, front-loaded accelerated depreciation, and the 2004 giveaway to big multinationals that deferred bringing international profits home until Congress wrote them a practically tax-free "blank check" method for doing so.

That's why I recommended (as an admittedly second-best solution to unlikely real reform of the income tax) that we keep the AMT, but refocus it.  Let the regular tax continue to tax ordinary taxpayers primarily on consumption, with progressive rates and a decent exemption amount.  Make sure the AMT exempts those ordinary folk but catches taxpayers in the upper middle class who would avoid paying little regular tax because of the aggregation of preferences --especially those associated with multiple home ownership.

Can we expect new, in-depth deliberation of these issues merely because a new Congress will take office in January, with another political party taking over the chair of critical House committees, including Charlie Rangel at Ways and Means?  The march to a consumption or national sales tax and the drumroll for estate tax reform will probably be slowed if not stopped altogether. Rangel will try to deal with the AMT, but it will be costly to do so through repeal unless some of the Bush revenue reduction measures providing relief to people at the top are scaled back.  Yet even Rangel has said that he will not try to roll back the Bush Administration's tax cuts.

So what measures can be taken in the midst of a strong partisan divide between the House (and maybe the Senate) and the executive during the coming two years?  They ought to be "obvious" ones that will address significant problems and are clearly feasible, without aiming for major Code-wide reforms. For example, why not deal with the projected Social Security shortfall by raising (or eliminating) the ceiling on the amount of income subject to the tax (and possibly even extending it to apply to capital gains and dividend income as well)?  What about addressing the noncompliance issues outlined by Joseph Dodge and Jay Soled in their article on the amount of basis misstatements, Inflated Tax Basis and the Quarter-Trillion-Dollar Revenue Question?  Across-the-board 10% withholding on gross proceeds from capital transactions would be a great step to help ensure greater compliance while preventing nonreporting, audit-lottery gambits.   We know withholding works from our years of experience with withholding on salaries.  Congress could even address some of the obvious shelters, without overcomplicating the Code.  For example, shareholders of S Corporations should not be able to avoid the payroll taxes that would otherwise be due if they were sole proprietors conducting the same business.

Maybe beyond these few areas, it would be good if Congress did not even try to enact any major tax legislation.  After all, though this administration has bragged about lowering the deficit, the current deficit only looks low in comparison to the administration's record deficits.  The amount of debt, and the need to raise some taxes and reduce some spending, are real concerns that will not go away by wishing it.  Let's give everybody a breather from annual or semi-annual changes to the income tax.  Instead, let the Joint Committee on Taxation do the work it is supposed to do--confer with Treasury, constituents, members of the House and Senate and outside experts across a broad spectrum of economic, tax policy, and, yes, social justice issues.  Deliberate, and make sure that the next tax bill is one that has been thought about and considered by more than a small in-group of lobbyists/drafters and an equally small in-group of "leaders" in power who negotiated it behind closed doors.  Whatever the result, it will be better for the country that the next tax bill come out of a transparent and clearly deliberative process where the pros and cons are laid out fully. 

Comments

[Tim H]

I agree with your overall conclusion thast little will happen in the tax arena in the next two years. Here in Indiana, three new Democrats were elected to the House, but they were each "Blue Dogs." They are not about to hand a "tax and spend" issue to their opponents in two years.

On the otherhand, continuing to substainatially overspend revenues is simply irresponsible.

I have not seen anybody propose what seems to me to be obvious - if the "War on Terror" is so important, isn't important to pay for it? What about a "War on Terror" surtax?

[LindaMBeale]

A tax to support war efforts is an interesting idea that has been addressed in various ways by those thinking about these issues. Certainly we have traditionally claimed that sacrifice is approriate to support a war.

I personally dislike the term "war on terror", because I think it misleads us in thinking about the most effective ways to deal with the problem. The term "war" tends to make us think that use of military force is appropriate, even when it isn't. Terrorism has always and will always be a danger lurking in the shadows to threaten civilized life. We must always be vigilant against the dangers of terrorism, in ways that attempt to achieve social justice, encourage tolerance, and ensure prudent arrangement of ports, bridges, nuclear power plants and transportation. But those prudent and social justice concerns that could help protect us from terrorism cost a good deal of money. So perhaps a surcharge (in the form of a rate increase on the top brackets) to pay for "Homeland Security" is not a bad idea.