Proposals for comprehensive tax reform.

• Author: Bentley, Darcy

Amid the turmoil of political upheaval in the current Congress, there is an increasing interest in proposals for radical reform of our tax system. Lawmakers in Washington are responding to criticisms of the current tax system with rhetoric and action that may eventually lead to a complete overhaul of the income tax structure. There are compelling arguments which suggest that taxing consumption rather than income would simplify our tax system, increase national savings, improve economic efficiency and enhance long-term economic growth. In fact, every proposal drawing attention on Capitol Hill would effectively shift, in varying degrees, the tax burden from income to consumption. If this move toward radical tax reform is real - as many believe it is - taxpayers should begin to look at what reform could mean for their bottom line. At a minimum, tax planners should be able to evaluate how these reform proposals would affect their clients.

The Unlimited Savings

Allowance tax system

The most developed of the proposals for comprehensive reform is the Unlimited Savings Allowance (USA) tax system (S. 722), introduced April 25 by Senate Budget Committee Chairman Pete Domenici and Sen. Sam Nunn. The USA tax has two integrated parts, the USA Income Tax and the business tax. The USA Income Tax base would be all wage and salary income (including employer-provided health and pension benefits currently excluded from taxable income), and rent and royalty income. The key feature of the USA Income Tax is the unlimited savings allowance that would let a taxpayer deduct the entire amount of net new savings (portfolio shifting is not allowed). In addition to the exclusion for net new savings, there would be a generous family, living allowance" - an exemption allowed on top of the current personal and dependent exemptions. Graduated rates would then apply to taxable income. Individual taxpayers would also be able to claim a 7.65% credit to offset the employee portion of payroll tax.

The USA business tax, although often described as an income tax, is a "subtraction method" value-added tax, and it allows immediate expensing of all capital investments. Generally, the business tax base would be the difference between total sales of goods and services in the U.S. and total business-related purchases, including but not limited to purchases of plant, equipment, inventory, rent, and legal and accounting fees. Interest and dividend receipts would not be taxable, but no...