There has been a lot of talk about tax reform but, as usual, most experts think it will be a long road – no surprise there. The main thing with tax overhaul is the idea that if you broaden the tax base, the government can then cut tax rates. The government did this in 1986 when they lowered the top tax rate from 50% to 28% and at the same time eliminated certain deductions.
The Joint Committee on Taxation did a study analyzing various tax proposals. They did not analyze either proposal from the presidential candidates. Under the study, all itemized deductions would be eliminated. That’s right, everything: Even mortgage interest, charitable contributions, state and local taxes, property taxes, etc. However, the Joint Committee said that even eliminating all of these deductions would only fund tax rate cuts of one to one and one-half percentage points.
So the tax rate reductions will not be nearly as dramatic as those in 1986, and the trade-off is that the public is going to have to give up many write-offs which people have depended upon for years. Understandably, it will be very hard for the politicians in Washington to sell this to the taxpayers. If it looks like there will be laws to this effect, we will be discussing it in more detail down the road.
Of course, even the Internal Revenue Service will be tasked with collecting the additional taxes.