President Bush Should Not Miss Opportunity To Simplify The Tax Code

President Bush Should Not Miss Opportunity To Simplify The Tax Code

President George Bush has an opportunity to simplify the tax code and cut taxes by eliminating phase-outs in the tax code, says Charles R. Enis, associate professor of accounting in Penn State's Smeal College of Business Administration.

A phase-out, Enis explains, is the loss of a portion of a tax benefit (ie: deduction, credit, etc.) as one's income increases. This results in an effective tax rate on the income increase that exceeds the rate specified for one's bracket.

Enis, who is also a member of the Complexity Reduction Committee for the American Taxation Association, explains that Bush could cut taxes by getting rid of the phase-out provisions in the tax code that were enacted during his father's time in the White House as well as those enacted during the Clinton Administration.

Phase-outs reduce tax benefits for high-income taxpayers and facilitate the targeting of favorable provisions to low-income groups. For example, Enis points out, Individual Retirement Accounts (IRAs) are intended to encourage taxpayers to pay for retirement. However, high-income individuals save regardless of tax incentives. Thus, the IRA deduction rules gradually reduce these deductions for taxpayers that actively participate in pension plans and have incomes exceeding certain thresholds.

Enis published a 1998 study, "Implications of Phase-Outs on Individual Marginal Tax Rates," in the Journal of the American Taxation Association.

Rather than add more rates to the tax code, Enis notes, President George Bush, Sr. had enacted two complex provisions to the tax code to raise revenue (the phase-out of itemized deductions and exemptions for certain high income tax payers).

"These two provisions were supposed to end after five years, but President Bill Clinton made the provisions permanent. Phase-outs are added to the tax code during times of deficit as an unobtrusive way to raise taxes. Eliminating phase-outs would be an unobtrusive way to remove them," says Enis.

There are over 20 phase-outs in the tax code, affecting everybody from low income to high-income brackets. Low-income taxpayers, for example, are affected by the phase-out of tax-free social security benefits.

"If Bush eliminates those phase-outs, he would cut taxes across the board and simplify the tax code," says Enis. "He could see what type of tax savings eliminating the phase-outs creates and then go from there."

Penn State's Smeal College of Business is a pre-eminent learning community, shaping business practice for tomorrow's converging economies. With 6,400 undergraduates, Smeal College has the third largest undergraduate business program in the country. In addition to the nationally ranked undergraduate program, Smeal College is home to internationally ranked MBA and Executive Education Programs. Smeal College's seven academic departments, as well as its ten research centers and institutes, present programs and studies in leading-edge areas such as converging economies, supply chain management, e-business, and entrepreneurship along with the traditional areas of marketing, management, finance, real estate, accounting and information systems.