Add Your 2 Cents to Ideas for a Tax Code Makeover

Hate the U.S. tax code? Now’s the time to speak up.

The President’s Advisory Panel on Federal Tax Reform, four months into examining what’s wrong with the U.S. income tax system, is soliciting ideas from the public.

It is possibly the first time in history -- and certainly the first time in generations -- that the general public has been asked to help revamp tax law, said Jeffrey Kupfer, executive director of the panel. Taxpayers have until Friday to submit proposals on how to fix or replace the income tax system.

The panel asked Americans earlier this year to submit comments on what was wrong with the code. That request unleashed a firestorm of complaints from individuals, businesses and experts. The complaints included personal pet peeves as well as issues affecting millions of taxpayers, such as the alternative minimum tax.

Experts also submitted testimony claiming various provisions in the code stymied economic growth, discouraged trade or undermined voluntary compliance.

“The overwhelming complaint -- the one that permeates everything -- is complexity,” said Kupfer. “It manifests itself in a number of different ways -- in people’s perceptions about fairness, in how the tax system affects the economy, and in complaints about the process of figuring out your personal income taxes.”

The current call for consumer input is more complex than the first one, Kupfer acknowledged. Now, instead of looking for problems, the panel is seeking solutions.

And there are rules: Reform plans should incorporate the president’s goal of simplifying the code without shedding its progressive nature -- richer Americans paying a higher percentage of income than those with less income pay. The code should continue to “recognize the importance of home ownership and charity in society,” according to the mandate the president gave the panel. And, reform plans must be “revenue neutral” -- neither increasing nor decreasing what the government rakes in.

Kupfer suggests that reform proposals be as specific as possible, including such details as what exemptions, credits and deductions would remain in the revamped system and how the proposal would distribute tax burdens by income groups.

Americans who want to weigh in on taxation can contact the panel by e-mail at comments@taxreformpanel.gov. Here is a sampling of ideas already offered, many of which are posted on the panel’s website.

* The libertarian Cato Institute proposed a “dual-rate” plan -- income below $90,000 a year for an individual, or $180,000 for a couple, would be taxed at a 15% rate. Income above those levels would be taxed at 27%.

Those rates are lower than the top rates currently paid by middle- and upper-income filers, which range from 25% to 35%, but there would be a trade-off: Almost all other deductions and credits in the tax code, including write-offs for mortgage interest and charity contributions, would be wiped out.

* Citizens for Tax Justice, a nonpartisan tax think tank, offered a similar plan, suggesting 15% and 28% rates and eliminating most deductions. However, it would retain write-offs for mortgage interest and charitable gifts.

* Rep. John Linder (R-Ga.) proposed a national sales tax that would replace the income tax. A set amount would be refunded to each taxpayer to ensure that people living at the poverty level would pay no tax, Linder said.

Under Linder’s plan, rich Americans would not pay a higher tax rate than the middle class. But because the wealthy buy more, he argued, the system would be fair.

“We would turn Americans into voluntary taxpayers based on how they chose to spend,” Linder said in an interview.

* Conservative groups have proposed various versions of a flat tax, exempting the poorest Americans. Everyone would pay the same percentage -- 17% under one proposal. Proponents argue that a flat tax would increase the revenue collected from the wealthiest Americans, because it would eliminate their use of tax shelters.

* Value-added taxes, or VATs, which are common in Europe, have also been proposed by numerous groups.

VATs resemble sales taxes but are collected in small increments at every stage of production of an item. Governments like VATs because they’re largely invisible and easy to collect.

* Jose Camahort of Lincoln, Calif., suggests replacing the income tax with a transaction tax levied on all wholesale and retail sales, imports, exports, securities trades, real estate transactions, wages and salaries.

Camahort estimates that the transaction tax, when fully phased in, would amount to only about 5% of the amounts being taxed. He says the rate could be adjusted based on how much revenue the tax generates.

* Alf Temme of North Hollywood proposed a similar plan, but he would have banks collect the tax. The presumption is that money from all economic transactions eventually land in a financial institution. That institution could then collect the tax by subtracting 5% from all new deposits.

* Dan Compton, a Brentwood, Tenn., retiree, would impose a flat tax on all income -- no deductions, credits or loopholes. Rate? He doesn’t know.

“Taking the gross income of the country and figuring what percent of it would be required to meet the country’s obligations might be very enlightening,” he wrote, before adding, “Good luck in getting Congress to do anything in its simplest form.”

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Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For previous columns, visit latimes.com/kristof.