Tax Liability

Tax Breaks reduce average tax liability by about $ 8,000 per return. A TAS analysis found that, on average, the tax liability of each individual who files a federal tax return is reduced by about $ 8,000 a year due to these tax breaks. Moreover, since tax is computed as a percentage of income, a taxpayer who pays a 25% tax rate could be benefiting from deductions or exclusions from income worth $ 32,000. The report presents an example of a fairly typical taxpayer who faces a 25 percent marginal tax rate on his taxable income, yet ends up paying an average tax rate of 9% on his gross income because of tax breaks.

If tax breaks are to be substantially lowered, many existing tax breaks will have to be eliminated immediately and others will be phased out. But I believe most taxpayers will conclude this is a worthwhile trade-off. If tax reform proceeds on a revenue-neutral basis, the average taxpayer’s liability will not change, and we will end up with a tax system that is simpler, more transparent, and easier and cheaper for taxpayers to navigate.

The report acknowledges that Congress may at some point raise tax revenues to address the nation’s long-term fiscal challenges. However, the report suggests that Congress first enact structural tax reform on a revenue-neutral basis and keep separate the decision whether to adjust tax rates.

Zero-Based Budgeting approach recommended. The report recommends that Congress approach tax reform in a manner similar to zero-based budgeting. The starting assumption should be that all tax breaks would be eliminated; a tax break would then be retained only if a compelling case can be made that the benefits of providing the tax break outweigh the complexity burdens it creates. The report suggests additional core principles for tax reform and summarizes key simplification proposals the Advocate’s office has made in past reports, including repealing the Alternative Minimum Tax for individuals and consolidating the number of incentives that encourage taxpayers to save for education and retirement.

The National Taxpayer Advocate is today launching a web page to solicit taxpayer suggestions regarding tax reform. What would taxpayers be willing to give-up if they knew that others are giving up their tax breaks and the end result would be a much simpler system? Olson asked. What particular provisions of the existing tax system are especially burdensome or seem particularly unfair? Suggestions may be submitted at http://www.TaxpayerAdvocate.irs.gov.

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