Volcker Report on Tax Reform Released

The President's Economic Recovery Advisory Board, chaired by former Federal Reserve Chairman Paul Volcker, released their report on August 27, 2010 on options for changes in the current tax system.  The Board was tasked with generating options to simplify the tax system, to improve taxpayer compliance with tax law, and to reform the corporate tax system.  The Board was created in February 2009 and consisted of 17 members drawn from industry, academia, and economics.  The Board was instructed by the president to exclude options that "would raise taxes for families with incomes less than $250,000 a year."  Furthermore, the Board did not consider major overarching tax reform, such as the introduction of a value-added tax.  The report doesn't endorse specific recommendations, but the findings could be referenced in future tax legislative proposals.  This report could also be overshadowed by the Alan Simpson and Erskine Bowles committee which will report (after the November elections) on ways to cut the federal budget deficit.

Some of the interesting options listed in the report include the following:

• Eliminating some of the penalty-free early withdrawal provisions from IRAs, such as for withdrawals for education, first-time home buyer expenses, and medical expenses.
• Eliminating minimum required distribution requirements where total retirement accounts are less than $50,000.
• Replace the numerous different long-term capital gain tax rates with a 50% exclusion.
• Limit or repeal Section 1031 like-kind exchanges.
• Have the IRS send taxpayers who don't itemize deductions a pre-filled tax return that they could simply sign or make simple updates to.
• Dedicate more resources to the IRS for enforcement actions, increase the statute of limitation period for audits, and examine multiple tax years at once.
• Increase information reporting and institute income tax withholding on "large payments" to independent contractors.
• Reduce the top C corporation tax rate from 35% (the second highest rate among developed nations) while expanding the tax base by preventing businesses possessing certain "corporate" characteristics from being classified as a pass-through entities (thereby avoiding C corporation taxes) such as a partnerships, LLCs, or S corporations.
• Reduce the amount of interest expense that can be deducted by C corporations by 10% of the amount of interest in excess of $5 million.
• Eliminate the domestic production deduction.
• Eliminate or reduce accelerated depreciation.
• Eliminate the exemption of credit unions from income tax.